At the risk of carrying owls to Athens, we would like to briefly summarize what tokenization actually means for those readers who may be looking into it for the first time. In general, tokenization is the process of creating a digital representation of certain real assets on the blockchain. Often these are securities, means of payment, company or project participations, loans, precious metals or even shares in real estate.
Tokenization generally fulfills two different functions. On the one hand, the need for certain intermediaries is eliminated, which helps to save transaction costs. On the other hand, illiquid assets can be made easily tradable in this way.
The first function of tokenization thus concerns the reduction of necessary intermediaries. This is a particularly important aspect in the issuance of tokenized securities. Unlike traditional issues on the capital market, neither a paying agent bank, nor a depository, nor other inter- mediaries are required. The company raising capital issues the tokenized securities (or 'security tokens') directly to the investor. The investor holds the tokens in their own wallet.
The second function of tokenization relates to the possibility of making illiquid assets liquid, i.e., preparing them for simple and rapid trading. A physical gold bar or shares in an apartment building are more difficult to trade than a token, for example. The limits of what is possible in tokenization are determined by economic, tax and accounting considerations. Once it has been determined which asset is to be tokenized and tax and accounting issues have also been clarified, there is generally nothing to prevent implementation. Two things are required for this.
In a first step, the digital representation of the asset is created in technical terms: A smart contract is published on any blockchain, which produces and manages the desired number of tokens. In practice, the Ethereum blockchain is most frequently used for this purpose. The tokens created in this way will later digitally represent the desired asset.
The second step is to link this digital represen- tation with the real asset. This second step – the interface between the digital and real worlds – is the real challenge. As a result, the holder of a token should be placed in such a position that they have a claim to the tokenized as- set that can be enforced in the real world. The legal protection of the token holder must be given top priority in the structuring of the project if the current trend toward tokenization is to pave the way for long–term and sustainable development.