Presently, the asset management industry is opaque, inefficient, and risk-prone
Blockchain technology enables the digital representation of assets using smart contracts
Tokenization, in itself, has the potential to transform asset management
Asset management is a pivotal process for any organization. Yet, in its present state, the asset management industry itself is rife with issues such as forgery, multiple versions of the same document, and lack of transparency. By enabling asset tokenization, Blockchain can play a major role in the transformation of the physical asset management process.
This can be done by automating tasks with the help of smart contracts, eliminating information mismatches using the distributed ledger as a single source of truth, and avoiding tampering of information with cryptographic encryption and time stamp.
In what follows, we explore the ways in which efficient, seamless, and secure asset tokenization on Blockchain can usher a new era in asset management.
The Present State of Asset Management
Before looking at how asset tokenization might help, it’s imperative to know the concerned industry in its current state.
In brief, asset management is the entire process of production, procurement, storage, and management of asset-related documents before, during, and after the process of ownership transfer. It is utilized for the trade of stocks, bonds, real-estate, equities, and other similar assets.
The multi-stakeholder asset management ecosystem involves a number of intermediaries, including brokers, custodians, auditors, and investors. As a result, the overall cost of the process rises. Also, it heightens the risk of errors and fraud.
Consequently, the industry, at present, is plagued by issues such as,
- Fragmented data storage – Every party has its own version of the data, leading to inefficiency, opacity, and low reliability.
- Lack of accountability – When it occurs, it is extremely difficult to pinpoint the source of error, given the complexity of the processes.
- Complex onboarding – The onboarding process is long, slow, and vulnerable. The fraudster can use forged documents and fake IDs to get onboard.
Asset Tokenization – Towards The Future
Tokenization is the process of representing real-world assets in the form of tokens issued on the Blockchain. It encompasses a range of asset classes, including equity, shares, stocks, bonds, real estate, precious metals, artwork, or other forms of intellectual property.
In general, it broadens the scope for investment, lowers processing time, and makes processes more liable. For asset management, in particular, tokenization offers the following benefits.
- Seamlessness – Using smart contracts, it is possible to automate the entire process of document production, storing and managing them. On a distributed ledger (Blockchain), every party has a copy of the same version of a document. This helps in avoiding any mismatches of information.
- Security – Blockchain-enabled decentralization eliminates the risks involved in the traditional single-point-access model of the industry. Moreover, assets on Blockchain are cryptographically encrypted, making them tamper-proof.
- Enhanced Control – Owners of tokenized asset data are in greater control, in terms of granting and revoking access, as well as data sharing. Tokenization also enhances the scopes for data monetization by allowing users to willingly and securely share their personal data with specific parties only.
- Automated Compliance – Compliance is a major factor in asset management. Smart contracts could prove beneficial in automating this process. In turn, this could reduce the losses caused by compliance-related errors.
To dive deeper into this topic, let’s understand the example of real estate asset management using Blockchain-based tokenisation.
Real Estate – The Biggest Gainer
Although many industries will benefit from tokenization in asset management, the real estate industry will probably be the biggest gainer.
The industry is huge. In India alone, the real estate industry is expected to have 3.7 million sq. ft. as stock in 2019. Moreover, by 2030, real estate could account for 13% of the Indian GDP, with a market cap of USD 1 trillion.
The problems outlined in the ‘The Present State of Asset Management’ section are inherent to the global real estate industry, including India. Moreover, the illiquidity of real estate assets compels a roughly 10-20% gap between the selling price and the actual value of properties. And, liquidity is something that tokenization brings to the table, making the market more profitable for sellers and buyers alike.
To conclude, tokenization and Blockchain implementation would rule out the many intermediaries involved in the asset management process. This will reduce costs, heighten efficiency, enhance transparency, and mitigate rampant corruption. Needless to say, asset managers would reap financial benefits from this transformation as well.