Technical Implementation and Market Size

Digital Securities

How to Digitize Securities Through Asset Tokenization

Series 3: Technical Implementation and Market Size

Selection Process

Technically, there is generally one main decision to be taken into consideration when issuing token. It is the selection of the Blockchain technology. The most widespread token standard used for is the Ethereum Request for Comments 20 (ERC-20), which has been a key differentiator for Ethereum’s blockchain. However, there are others gaining momentum, such as Solana.[i]

Tokenization of Ethereum

In Ethereum lingo, asset tokenization refers to the development of software code, usually using the Solidity programming language.[ii] Using a smart contract, tokens backed by underlying assets are executed via the network. The terms of the parties' agreement are recorded as lines of code, making the smart contract self-enforcing and self-executing.

As permissioned DLTs embed additional considerations, especially on the regulatory side, another token standard has emerged for representing tokens issued on Ethereum, the ERC-1400, which includes additional functionalities such as the possibility for a controller to force the transfer of an asset. 

With ERC-1400, identification of investors and whitelisting can be programmatically controlled and automated. Investors must comply with regulator and administrator requirements, which vary by jurisdiction. This standard encourages securities asset servicing and allows for corporate actions such as dividend distribution. The asset's properties define which token Ethereum standard to use.[iii]

ERC Standards

Transfer 

1.1 ERC-20 Standard (Fungible Assets): Transfer of value between users.

1.2 ERC-1400 Standard (Security Token): Transfer of ownership of a security token between users, requiring a certificate.

1.3 ERC-721 Standard (Non-Fungible Token): Transfer of ownership over a specific asset between users.

Authorization

2.1 ERC-20 Standard (Fungible Assets): Authorize someone to spend value on one`s behalf.

2.2 ERC-1400 Standard (Security Token): For same security token, split between several partitions. Authorize an operator to transfer a security token on one’s behalf. Manage the documentation associated with a security token. Force the transfer or redemption of an asset (by a controller).

2.3 ERC-721 Standard (Non-Fungible Token): Authorize an operator to transfer a specific asset on one’s behalf. Authorize an operator to transfer all assets on one’s behalf.

Growth Prospects

As the market for tokenized assets grows in size, crypto-savvy Fintech companies are no longer alone on the playing field. A significant number of traditional players are entering the market for asset tokenization. Survey data from the Cambridge Centre for Alternative Finance [iv] shows that service providers operationally headquartered in North America and Europe indicate that business and institutional clients make up 30 per cent of their customers.

Potenital in Europe

As the EU-wide regulatory framework, known as the Markets in Crypto Assets Regulation (MiCA), goes into effect, the market for tokenized assets will gain further momentum in Europe.[v] According to a paper by Frankfurt School Blockchain Center, substantial money inflows from financial institutions are expected as cryptocurrencies become more legitimate assets.[vi] Digital securities are expected to reach a Market size of €1.4trn in 2024. 

 

[i] Anatoly Yakovenko (n.d.), Solana: A new Architecture for a high Performance Blockchain v0.8.13, https://solana.com/solana-whitepaper.pdf

[ii] Chriseth (2018), Solidity Programming Language, https://github.com/ethereum/solidity/releases/tag/v0.4.21

[iii] Vitalik Buterin (2014), Ethereum: A Next-Generation Smart Contract and Decentralized Application Platform, https://ethereum.org/669c9e2e2027310b6b3cdce6e1c52962/Ethereum_Whitepaper_-_Buterin_2014.pdf

[iv] Apolline Blandin, Dr. Gina Pieters, Yue Wu, Thomas Eisermann, Anton Dek, Sean Taylor, Damaris Njoki (2020). 3rd Global Cryptoasset Benchmarking Study. Cambridge Center for Alternative Finance, University of Cambridge, UK. https://www.jbs.cam.ac.uk/faculty-research/centres/alternative-finance/publications/3rd-global-cryptoasset-benchmarking-study/

[v] General Secretariat of the Council of the European Union (5.10.2022), Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937 (MiCA), https://data.consilium.europa.eu/doc/document/ST-13198-2022-INIT/en/pdf

[vi] Paper by Benjamin Schaub, Stefan Schmitt, Frankfurt School Blockchain Center, Tokenization in Europe - Market Size to Reach €1.4trn in 2024, Medium Article (04.03.2020), https://medium.com/@benjamin.schaub/tokenization-in-europe-market-size-to-reach-1-4trn-in-2024-d1603e086085

 

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