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Asset tokenization is the phenomenon in which real tradable assets like real estate, shares of a company, or a piece of art are represented on a blockchain network by issuing a digital security token that can then be traded between sellers and buyers. So, tokenization of assets can be thought of as the breaking up of whole assets into shares known as tokens.

There are a lot of advantages when it comes to asset tokenization. One of the big ones being that asset organization makes trade a much more flexible process. Another is that it is beneficial to the preservation of certain types of assets, and it also makes trading more convenient. It does this because as blockchain assets can be divided into smaller units, this increases liquidity. Let’s just take a traditional real estate transfer for example- usually, any kind of real estate has to be transferred in its entirety from a seller to a buyer-, when real estate is tokenized, it can then be divided and sold as units, this makes it easier to trade in a number of ways. There are lower capital requirements for potential buyers, this, in turn, expands the pool of potential investors as shares of a tokenized asset are more affordable and on top of this, you can engage with a wider geographical range. Shares are also much more liquid than whole assets which mean fewer processes involved and less time spent executing the trade, in fact, with tokens on a blockchain network, transactions can take place in near real-time thanks to the nature of smart contracts which virtually eliminates the possibility of anyone defaulting on a contractual obligation.

Assets organization can also help with the preservation of certain assets. When you take something like a high-value piece of art, for example, there is always a chance that it could get damaged during a physical trade harming its value. With tokenization, no physical transfer of the artwork is required which ensures the safety and condition of what is being traded.

Over 15 countries around the world have defined regulatory frameworks for the financial instrument with several others on the way. Most countries already have existing securities frameworks that digital securities fall under, but these often do not specifically define the concept or create a token framework to place securities under.

An example of a country that has created a token framework is Brazil, which was one of the first to do so. In November 2017, the Brazilian securities regulators (CVM) released an official statement about token sales on their website. Brazil also has very open views on Blockchain. The CVM has made it possible for ICOs and distributed ledger technology-based tokens to succeed if they can clearly distinguish themselves from being classified as a security.

In Africa, a country that has passed legislation for security tokens is Nigeria. In September 2020, the Nigerian SEC came out with a statement regarding all crypto and virtual assets would be considered security tokens.

STO Framework: All Digital Assets Token Offering (DATOs), Initial Coin Offerings (ICOs), Security Token ICOs, and other Blockchain-based offers of digital assets within Nigeria or by Nigerian issuers or sponsors or foreign issuers targeting Nigerian investors, are subject to the regulation of the Commission. And Token issuers have to prove to the Nigerian SEC that they do not fall under securities laws after registering.

Now in Europe, there are still some EU restrictions surrounding security tokens, but an example of a country that passed security token legislation in France. In December 2017, the Blockchain Order was passed to allow for the delivery of securities against payment (settlement) for unlisted financial instruments, paving the way for security token technology. So much so, that some of the biggest banks in France have created subdivisions dedicated to digital security tokens, such as Société Générale with its FORGE division. And in March 2020, the AMF of France released a legal analysis dedicated to security tokens. In this document, the AMF has acknowledged security tokens as their traditional counterpart and has declared the need for all the right licenses for financial services providers operating in the industry, including the need for an MTF (Multilateral Trading Facility) license for secondary exchanges.

It is important to note that, although many countries do not have yet a clearly defined legal framework for it yet, there are still many countries such as the US and Germany that have been making big advancements in establishing legislation for security tokens. Some countries, such as Austria, Spain, Italy, and many others, support security tokens under their existing securities frameworks but do not have legislation or regulations specifically defining security tokens.