Overcoming Challenges in Asset Management through Tokenization

Asset tokenization is the process of transforming ownership rights in a real-world asset (RWA) into digital tokens stored on a blockchain. These RWA tokens function as tradable units on a secure, decentralized ledger, fostering greater transparency, efficiency, and accessibility in asset ownership and transactions.

This article discusses the challenges of the alternative asset management industry and the 8 key benefits of tokenization that help address those challenges effectively.

TLDR - Tokenization provides the following benefits to asset managers and investors

  • Increase in Assets Under Management (AUM)
  • Offer new tokenized investment products and stay relevant
  • Create new revenue streams
  • Increase distribution channels
  • Become Web3 compatible 

A Glance At The Challenges of The Alternative Asset Management Industry

Traditionally, the alternative asset management industry, which focuses on alternative investments such as private equity (PE), private credit, real estate, and hedge funds, caters to institutional investors with high entry barriers, often requiring minimum investments worth up to millions of U.S. dollars. This hindered access for many individual investors, and in turn, created a supply and demand gap in the alternative asset investment landscape

As per Bain & Company, “Alternatives managers face growing fund-raising challenges from institutional investors as supply exceeds demand. Consider the fund-raising results from the first half of 2023, when, according to Preqin fund-raising data, PE fund-raising supply was three times higher than investor demand—the widest gap since the financial crisis.” 

Although individuals control over half of global wealth, only a small fraction (around 5%) is invested in alternative assets. According to a Bain study in November 2022, a significant portion of high-net-worth individuals (53% with $5 million+) plan to increase their allocation to alternative assets to improve diversification and seek higher returns. The main reasons for accelerating allocations to alternative assets include enhanced liquidity (59% of respondents), increased transparency in holdings (45%), better performance of alternative assets (45%), and easier access to alternative products (38%).

Global wealth allocations by investor type, $ trillion, 2022. Source: Bain & Company

As a result, asset managers and digital platforms have been increasingly exploring and embracing asset tokenization to expand access to individuals

Asset managers are looking to wealthy individuals' capital to fuel growth. Source: Bain & Company

So, how can asset tokenization bridge this gap, connect asset managers with a broader universe of investors, and propel a multi-billion dollar investment industry forward? Read on to find out!

8 Key Benefits of Asset Tokenization

1. Enhanced liquidity

One of the most transformative benefits of asset tokenization for property owners lies in its ability to unlock liquidity for traditionally illiquid assets. 

In conventional finance, assets like private equity, real estate, or fine art can be difficult to buy, sell, or trade due to their inherent characteristics. They often require significant upfront investments and lack readily available marketplaces.

Asset tokenization disrupts this paradigm by creating RWA tokens that represent fractional ownership of the asset on a public blockchain. These RWA tokens unlock a wider investor pool, including retail participants, and enhance liquidity via secondary market trading.

Imagine a commercial building worth $10 million. Traditionally, only a few wealthy investors could join in such ventures. With real estate tokenization, ownership of the building can be divided into digital tokens, say $10,000 each which enables a broader investor base for such real estate. Moreover, instead of being tied to a high-value property that's hard to sell, real estate investors can trade these tokens representing shares in the property on secondary markets and enjoy liquidity benefits.

2. Improved accessibility

Traditionally, the alternative asset management industry, a playground for institutional investors, offered limited access to common investors due to financial or regulatory hurdles. As a result, common investors often miss out on the highest-upside assets. Examples of such high-return but low-access assets include venture capital, private equity, high-value real estate, and fine art. 

Apart from that, many asset classes are limited by geographical location. For instance, investing in a specific real estate project in another country can be difficult due to local regulations and market access.

Asset tokenization has solutions to address those challenges. By enabling fractional ownership, tokenization breaks down expensive assets into smaller, more affordable units called RWA tokens. Furthermore, tokenized assets reside on a global, borderless ledger, eliminating geographical limitations. This empowers everyday investors to participate in a wider range of investment opportunities, fostering a more inclusive investment landscape and the potential for greater returns.

3. Increased efficiency

Traditional financial markets often suffer from fragmented data across siloed systems that lead to manual processes, errors, and higher costs. Furthermore, settlement delays, caused by multiple intermediaries and manual verification, tie up capital and reduce agility.

Asset tokenization introduces a catalyst for efficiency, leveraging blockchain technology to streamline financial processes and enable savings. 

  • Tokenized assets are stored on a shared, decentralized ledger, thereby ensuring a single source of truth for ownership and transaction history. This eliminates the need for reconciliation and fosters greater transparency for all participants.
  • Smart contracts automate processes like dividend distribution and compliance checks, effectively cutting reliance on intermediaries and reducing operational costs.

Increased efficiency translates directly to benefits for both issuers and investors. Token issuers enjoy lower costs associated with launching and maintaining their tokenized offerings. These savings, stemming from streamlined processes and reduced reliance on intermediaries, can be passed on to investors in the form of potentially lower investment fees or more attractive investment terms. 

Ultimately, asset tokenization fosters a win-win scenario for all participants in the investment landscape by creating a more efficient, transparent, and cost-effective ecosystem.

4. Better transparency

Traditional investment in many high-value assets can come with limited information availability.  Investors often lack access to reliable and readily available information on crucial metrics like returns, ownership history, and transaction history. This lack of transparency, particularly for foreign assets or those where pre-purchase inspection isn't feasible, creates a significant hurdle for informed investment decisions.

Tokenization leverages blockchain technology to create a shared, tamper-proof ledger for ownership and transaction records. This can include all ownership changes, transactions, and relevant data associated with the tokenized asset, such as returns generated through interest or dividends. This enhanced transparency empowers investors to make informed economic decisions, while also fostering trust and reducing fraud risk for both property owners and investors.

Also read: Public or private blockchain for asset tokenization?

5. Enhanced diversification

A clear benefit of tokenization for investors is “portfolio diversification”. Tokenized RWAs offer a new digital asset class for investors to diversify their portfolios, unlocking a wider range of opportunities beyond traditional stocks and bonds. This aligns with a Bain study, that indicates “improved diversification” is a major force for individual investors to tap into tokenized RWAs. 

This diversification helps investors:

  • Reduce portfolio risk: By spreading investments across different asset classes, investors can mitigate the risk associated with any single asset class experiencing a downturn.
  • Improve risk-adjusted returns: RWA tokens can potentially offer attractive returns with lower overall portfolio volatility compared to traditional asset classes.
  • Unlock previously inaccessible investments: Tokenization allows investors to participate in private markets previously out of reach due to high minimum investment requirements.
6. Faster payouts

Before asset tokenization, investors often endured a lengthy waiting period for payouts. Third-party providers and back-office services meticulously double-check information like wire instructions, mailing addresses, and ownership records before initiating periodic interest or dividend payments. 

For instance, asset-backed securities can be particularly cumbersome regarding payouts due to their complex structures and variable income streams. Traditionally, these cash distributions (often occurring monthly) involve a series of manual steps, further delaying investor access to their returns.

In tokenized assets, benefits payouts are governed by smart contracts—decentralized programs running transparent, auditable code. Smart contracts automate payouts based on triggers, bypassing third-party verification and delivering cash flow directly to investors' digital wallets. 

For instance, in tokenized real estate, rental income is automatically distributed to token holders on a set schedule.

7. Enhanced settlement

Before blockchain, settling an investment involved three steps: trade matching, clearing, and settlement, typically taking two days or so for cash and securities exchange via a centralized clearing and settlement agent like DTC. 

Blockchain can significantly speed up the settlement process by automating many manual steps and eliminating the clearing intermediary.  Instead of a three-step process, blockchain facilitates a two-step process (match and settle) that is nearly instantaneous with well-scalable blockchains. This faster settlement allows for quicker access to cash and investments by both parties involved.

8. Expanded use cases

The digital transformation of real-world assets links their value to the flexibility of the DeFi ecosystem, unlocking new functionality such as the creation of liquidity pools for RWA tokens offered by our sister platform IX Swap

RWA tokenization offers additional benefits and useability for real world assets. Borrowers can obtain stablecoins or other crypto assets by pledging their RWA tokens as collateral, up to a specified loan-to-value ratio. Asset-backed private credit protocols, such as Centrifuge, Goldfinch, or Credix allow borrowing crypto assets using RWA as collaterals. 

Moving forward, the continued development of blockchain technology and smart contracts promises to unlock a universe of even more innovative use cases for asset tokenization. 

Reap The Benefits of RWA Tokenization With InvestaX

The alternative asset management industry has suffered from an unbalanced supply-demand gap, hence asset managers are actively seeking solutions to tap into a broader investor base. Asset tokenization fosters a win-win scenario for all participants in the investment landscape. Through asset tokenization, property owners benefit from enhanced liquidity and reduced operational costs, while investors enjoy improved accessibility, greater transparency, and opportunities for diversification.

RWA tokenization isn't merely a trend. It’s slated to be the vanguard of a revolution that transforms the investment landscape. As liquidity cascades, fractional ownership blossoms, and transparency illuminates, we stand on the precipice of a new era.

InvestaX is well placed to stand at the heart of the tokenization industry with the required licenses and full suite of services for RWA tokenization. Our Monetary Authority of Singapore (MAS)-licensed Tokenization SaaS platform is a software-as-a-service solution that enables the issuance, trading, and custody of RWA tokens for private market assets. Giving flexibility to issuers and investors to access these new markets.

Brace yourselves as RWA tokenization continues to evolve, promising innovative applications and unprecedented opportunities for investors and asset owners alike. The future is here.

Leave us a message or contact us at support@investax.io to kickstart your RWA tokenization journey in a legally compliant manner today!