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Before we explain anything that is connected with Tokenization and the process of turning real things into digital ones, it is necessary to understand the entire concept hiding behind this. Imagine that you have a business that is worth hundreds of thousands or even millions of dollars. Now, suddenly you are in need of money. Even though you may not need such great amounts of cash, you still have to prepare all the paperwork and listen to offers for the entire business. Such thing will happen if you decide to sell your business in an old-fashioned way.

However, let us assume that instead of doing that, you can print digital tokens, which are worth certain amount of money. Every token would be the representative of a share of your business. However, to print such digital assets, it is necessary to find a platform that supports smart contracts. One of the most popular options out there is one of the altcoins with long and very rich tradition, namely Ethereum. Though we could talk about all the details and explain everything, let us move to more interesting aspects. Let us move to the part, when we say that such things as smart contract template, text editor, and of course Ethereum wallet address are necessities without which it is impossible to start your own tokens.

This is one of many ways that can help you out, since the value of your tokens can either go up or down and it is all dependent on demand. To put it even simpler, if you follow these steps, you will create a digital print, a representation of your business on a blockchain. This is how we tokenize assets.

When did this concept appear?

Although the beginnings of this concept are not new, there are some alterations and improvements that appeared quite recently. The entire idea of tokenization is simply an old concept of securitization, which had much broader applications. The process of securitization was used long before the era of crypto world appeared. Back then it was used as securities – third-party investors purchased cash flows of many different contractual debt obligations. It included credit card debts, auto loans, mortgages, and many other. Quite often they were known as bonds. Of course besides that, they were also called CDOs, Collateralized Debt Obligations.

The most important thing to know is that we change a variety of items, objects, and things of any sort into securities.

What are the differences between tokenization and securitization?

The most important different is simply the form of tokenization. Tokenization is based on a blockchain. When it comes to the term itself, there are dozens of different interpretations of what “token” can really mean. The most basic meaning of “token” is that it is one unit, one particular fragment of asset or utility. However, people quite often distinguish three types of tokens, and that is currency tokens, utility tokens, and security tokens.

Currency tokens are the most popular, the most obvious types of tokens. We can think of classic cryptocurrencies such as Bitcoin when thinking about currency tokens. They appear on brand new, independent blockchains. As a result, they do not make use of assets. Their value comes from the mechanism responsible for its distribution. The name of currency tokens explains how to use them. They are meant to be spent, to be received, or to be traded. Utility tokens are not as simple as currency tokens. It is all due to the fact that the whole purpose of getting utility tokens is to later on receive an access to a service or to a given product that hides behind the token itself. Utility tokens are usually very important when it comes to rising money for the further development of the product. Although these utility tokens were not investments, in many cases they are treated this way.

Contrary to utility tokens, security tokens are, to put it simply, investments that we can make. Security tokens are like shares, which appear and coexist on previously created blockchain. We can say that selected token is a security token if the authors sell it as the opportunity for investment, it is predicted that the owners will take care of the business, and it is expected that in the future the business, and therefore the tokens themselves, will make profits.

Why blockchain is such a great idea?

Transparency is one of the simplest and most important reasons. If we follow the example presented above, we can see that every single transaction that happened on Ethereum blockchain is saved, secured, and included forever. It means that it is impossible for you to lose the ownership of tokens that you created. However, since we apply tokenization, we need to remember that all the legal responsibilities are now strictly connected with these tokens.

Still, we should bear in mind that tokenization with the use of blockchains is very cost-efficient. It is because we do not have to pay for intermediaries, lawyers, and other third-parties. Of course we still have to find someone who will program a smart contract appropriately. However, once it is done, the later fees and expenses are almost equal to zero!

Where are the advantages?

Although there are many advantages of using tokenization, there are several downsides. One of them is the difficulty related to the regulation of the entire process. Although, in theory, the idea of tokenization is supposed to be in correspondence to all law regulations, the reality is completely different.

One of the problems is the lack of strong and constant link between the asset and the real entity. If, for example, our business gets damaged or even destroyed by natural disaster, it is almost impossible for the people, who purchased tokens, to put in for investor protection rights. The only way to enforce them are regulations.

Still, there are some institutions that are about to offer on-blockchain services in the form of validators. These validators check whether all the regulations are met in the particular region. We can carry on with the deal and begin tokenization only if all the elements are true. As a result, we reduce the risk. However, this concept is just a concept and we still do not know how it would work in the real-life conditions.

What are STOs and why are they so important?

Security Token Offering is a platform used for the purpose of fundraising. In most cases it facilitates tokenization. Still, we should bear in mind that some time ago there was a very similar term, known as Initial Coin Offering. ICO used the idea of utility tokens, and its capability of raising millions of dollars based on the concept that was too poor in its preparation to be true. This idea; however, was a huge failure due to legal issues.

Although STOs are quite similar, the legal problems disappear since in this case we are dealing with security tokens and, as it was earlier on explained, these tokens can be easily backed by real assets. Of course we still need to remember about applying regulations and frameworks, what is at this moment almost unheard. We can name only few companies that are dealing with STO listings and they verify every security token with the use of many different tools. What is more, all the investors need to be checked in compliance with the European Union Markets, which can be found in Financial Instruments Directive II.