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08 September 2023·5 min read

Ada Vaughan

Vice President & Global Partnerships, Conduit

Understanding Fintech’s Future: Tokenized Assets

One of the biggest recent developments in fintech is the explosion in popularity of tokenized assets.
So what are they all about, and who should be interested?
This guide will explain how tokenized assets work, what types of assets can be tokenized, and how fintechs can build products using the exciting new technology.

What are tokenized assets?

Picture tokenized assets as little virtual vouchers on the internet that stand in for real-world things like money, goods, stocks, or other financial items. The magic behind these tokens is something called blockchain technology.
With this technology, the ownership of these tokens is tracked 24/7 on the blockchain ledger, while their value is pegged to the real world version, which is held in reserve.
These tokens are very handy as you can redeem, transfer, or convert them super easily.

What are the different types of tokenized assets?

Stablecoins

Stablecoins are like digital stand-ins for real cash, such as US dollars. Some examples you might've heard of include USDC, USDT, and DAI. These stablecoins are made to match the value of real money.

Think of it like this: For every stablecoin token that exists, there's an equivalent amount of real-world money kept safe in a bank. So, USDC, for example, is what we call an asset-backed stablecoin. For every USDC token out there, there's a real US dollar stored away. It's a digital dollar, basically!

In fact, Circle – the issuer of USDC – publishes monthly  attestation reports showing the makeup of the asset reserves that back USDC. Every USDC token is redeemable 1:1 for USD, making it an especially liquid and safe type of tokenized asset.

Bonds

Bonds can also be tokenized. Just like buying a small piece of a company when you buy stocks, you can buy a little piece of a bond with tokenization. This lets you buy in whatever amount you're comfortable with - we call this fractionalization. As the bonds mature, you earn some money back proportional to your share of the bond.

Alternative Investments 

Other types of real world financial assets can be tokenized like bonds.
Mercado Bitcoin in Brazil, for example, tokenizes alternative yield instruments such as energy contracts. This process allows investors to purchase shares of the contracts, earning yield as the contract terms are met and paid out.
These alternative investments are typically denominated in their local currency – the MB Energy token used in the example above is denominated in Brazilian Reals, for instance – they are an attractive diversification option for investors looking for new ways to grow their wealth.

What are the benefits of tokenized assets?

Increased access

One of the main benefits of tokenizing real world assets is improved access to powerful financial products for underserved markets.
Primarily, this refers to the option of transacting in USD and USD-backed products from outside of the US. Traditionally, this has been difficult for fintechs and their users in many regions, due to regulation, cost and liquidity. Digital dollars make it much more accessible to move from local fiat to USD, securely and transparently.
Plus, fractionalizing real world assets provides more accessible opportunities for investors by enabling much lower or removed minimum investments.
T-bills, for instance, traditionally have a minimum purchase of $100 USD. Tokenization can remove this requirement by allowing investors to purchase a fraction of that bond, represented in digital assets.
And tokenization removes the barriers typically associated with international investing, making alternative assets available across borders. 

Transparent ownership 

When tokens are issued, it's all recorded on the blockchain. This means it's super transparent - you can always see who owns what. This can cut down on fraud and makes it easier to check transactions for audits.
This also causes a  reduction of intermediaries. Because of the unchangeable nature of the blockchain, transactions made using digital dollars have lesser need for various processes that require third parties. This can cut down the risk of fraud, manipulation or unauthorized changes to data.
Another advantage is in the increased auditability of transactions. Because every transaction made on the blockchain is visible and comprehensively recorded, it is easy for fintechs to make efficient audits of their transaction activity, ensuring compliance with regulations and internal policies.

More efficient transfers 

By removing many of the intermediaries and clearing processes traditionally required for payments – especially those made cross-border – transfers can potentially be made much faster.
This also has an effect on transaction cost, as each intermediary in the traditional process would incur additional fees. By reducing the overall steps required for cross-border transactions, the cost can be reduced as well.

How fintechs are using tokenized assets for their products

B2B Cross-border Payments

Digital dollars like USDC enable B2B payments in and out of the US for fintechs that do not have access to a US bank account.
This includes common payments like invoice settlements, freelancer payments through services such as Upwork, contractor payments and more.
In order to make B2B payments using stablecoins, fintechs partner with platforms that can convert local fiat to digital dollars and are registered as money transmitters or money service businesses. 
Platforms convert the fiat to digital dollars, redeem the digital dollars for USD, and complete payments by sending the USD to the payee using traditional payment rails such as ACH.

Interest-bearing Accounts

Access to fractionalized US-Treasury bonds allows fintechs from Africa and other regions outside of the US to build interest-bearing accounts for their users based on one of the safest and most liquid investments in the world.
Because the yield is denominated in USD, these products can double as a hedge on inflation for regions with volatile local fiat currencies. Value is saved in USD, earning yield as it is stored, and can be withdrawn and converted back to the local fiat at any time.

How to building products with tokenized assets

As fintechs in Africa look to provide meaningful financial products for their users, Platforms like Conduit are empowering them with tokenized assets, which are becoming an increasingly important piece of the puzzle.

More and more opportunities are enabled by tokenization every day, enabling powerful ways to make saving, investing and transacting more efficient.

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