Tokenization vs. Securitization - Know the Difference
Tokenization vs. Securitization is the same aspect of one coin, but what are the differences?
Securitization is the process of pooling mortgages, auto loans, and credit card debt obligations and then giving credit investors a portion of that debt.
Although the practice dates back to the 18th century, it is most commonly associated with the 1970s and 1980s, when Wall Street traders revitalized and breathed new life into it. More on this can be found in Michael Lewis' excellent book.
Tokenization, on the other hand, describes a process in which a sensitive data element is replaced with a non-sensitive equivalent, known as a token, which lacks extrinsic or exploitable meaning or value. Tokenization is thus a process that is similar to, but not identical to, encryption.
The private key is a sensitive data element, whereas the public key is a token.
For example, according to the PCI Council, an information security standard that all credit and debit card providers must follow, the payment card number (PAN), which includes the cardholder's personal information, must be tokenized and replaced with a surrogate value known as a token. The token is then used when transacting, and so on.
Tokenization took on new meaning with the advent of blockchain and cryptocurrencies. Asset tokenization, according to strategy & is the process of converting assets into digital tokens on a blockchain. The following are potential tokenization acquisitions:
- Fiat currencies
- Commodities
- Real estate
- Art and collectibles and more.
Tokenization vs. Securitization - Which is Better?
Both tokenization and securitization are some aspects of one coin, but tokenization is a broader term that means digitalizing assets into tokens.
One use/type of tokenization can be securitization, creating security tokens. This use of tokenization is of the most interest to financial executives.
Reasons Why Tokenization is Better:
- Reduction or elimination of intermediaries - As we saw in the tokenization process above, blockchain technology can reduce the need for conventional intermediaries, and many steps in the traditional securitization process can be automated.
- Speed, Cost, and Efficiency - Tokenization eliminates the need for intermediaries, reducing costs and speeding up the entire process.
- An immutable record of ownership and transaction history - The ownership history, proof of ownership, transaction history, and legal rights associated with a given token is intrinsic to the token itself and cannot be changed. This reduces fraud risk and could reduce legal disputes over rights and ownership claims. It also allows for easy, trustworthy auditing.
- Increased Liquidity - Tokenization of securities can create new liquid securities from previously illiquid assets, increase investor access through simple fractionalization, and provide liquidity premiums. It unlocks additional value for issuers and resellers, just like traditional securitization has done.
How is the Rise of Tokenization Affecting the Economy?
Tokenization can revolutionize the financial landscape‒intrinsically changing how investments are managed, used, and monetized.
In addition, the tokenization process facilitates the creation of many new financial products, allowing every person and organization to diversify their global investment portfolio, regardless of income or size.
Tokenization's importance stretches beyond investment access; it could also facilitate new investing models. Currently, most investments leverage shareholder capitalism, striving to optimize profits and share price.
For example, when you buy a company's stock, you provide money in exchange for a share, but how the company is run and governed is mainly outside your direct control.
Since tokenization leverages smart contracts, it could manage financial investment and facilitate voting and ownership rights.
Will Tokenization and Securitization Dominate the Future Markets?
Blockchain already has the benefit of decentralization. Bureaucracy, manipulation, convoluted systems, ill-informed decision-making, and unequal benefit distribution are symptoms of excessive centralization by the federal government, states, and large corporations.
Decentralization could aid in process optimization, leveling the playing field for the network of intermediaries. Security token offerings, or STOs, were one of the first ideas for tokenization in the blockchain.
The Security Token Offerings emerged after the 2017 ICO boom. With almost every startup promising enormous profits for investors, the tokens were created for internal use. But, unfortunately, the token did not have any support other than the price of Bitcoin and the aspirations of entrepreneurs.
Therefore, the future will be tokenized with use cases of highly significant investment projects. The Security Token Offering or STO refers to tokens that are digital counterparts of securities or just tokens with signs of securities.
Tokenized assets can represent complete or part ownership rights to other assets such as real estate, artwork, and other assets. The advantages of tokens also provide a detailed answer to why tokenization is the future.
First, dividing any investment, property, or asset into multiple tokens is possible. As a result, small investors could discover prolific investment market opportunities without entering investment funds.
Most importantly, tokenization could ensure simpler investor registration procedures alongside reducing the final threshold for participating in investment markets.
As a result, tokenization can offer substantial prospects for creating a securities market without having a stock exchange. In addition, tokenization could support a simpler registration process and the process for registering ownership alongside other facets of transactions.
Tokenize Your Real-World Assets with UFUND
The process of digitizing assets, backed by blockchain technology so they can be securely bought and sold, is called tokenization.Asset tokenization is now a very popular approach for raising funds and making your assets useful in a very efficient manner.
UFUND lets its users tokenize their assets and raise capital.
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