Blockchain technology is revolutionizing industries, and one of its most exciting applications is real-world asset tokenization. Tokenization allows physical assets—such as real estate, art, commodities, or intellectual property—to be represented as digital tokens on a blockchain. However, most tokens are subject to the existing regulatory frameworks, which could take years to get approved and incur substantial legal fees. Non-Fungible Assets (NFAs), an innovative solution introduced by CoreLedger, address these challenges and meet the specific needs of real-world asset digitization, providing a flexible and compliant way to make assets tradable. This article will use an actual case study to explain how NFA works.
Token Categorization
First, let’s understand what are the token categories if you were to tokenize real-world assets without NFAs.
In 2018, the Swiss Financial Market Authority (FINMA) issued guidelines on the regulatory treatment of tokens, classifying them into three main categories:
- Payment Tokens: These are synonymous with cryptocurrencies, often intended as a means of payment, though their use may evolve over time.
- Utility Tokens: Tokens designed to grant access to a specific application or service.
- Asset Tokens: Similar to traditional securities, they represent real-world assets, such as equity, debt, or entitlement to dividends or interest.
Occasionally, tokens may fall into multiple categories, known as hybrid tokens, which are subject to cumulative regulatory requirements. Sometimes, a tokenization process does not fit any of the aforementioned categories, which can give the issuer a hard time with the regulator.
Digitization rather than Tokenization
Tokenization is commonly understood as creating a digital representation of a value, be it utility, monetary, or asset value. Holding this digital representation gives the holder control over the value vested in the asset. However, one does not necessarily have to go that way.
A prime example is Finemetal, a renowned Swiss gold dealer. Finemetal leveraged blockchain technology to digitize a storage certificate without triggering securities regulations. They have been in the gold business for over 20 years, selling physical gold to their customers and storing it for them. As a customer, you get a non-transferable storage certificate in your name. Only you can either claim the physical gold or sell it through Finemetal. Tokenization of the gold wasn’t the right approach. However, digitization of the non-transferable storage certificate proved to be the answer. The result is the same as what Finemetal had with the paper-based storage certificate, except for removing the necessity of physical interaction between the customers and Finemetal for buying, storing, redemption, and selling the physical gold because cryptography replaced the physical presence of the customer in all those processes.
What Are Non-Fungible Assets (NFAs)?
CoreLedger’s introduction of Non-Fungible Assets (NFAs) is the answer to the question of how to profit from the digital transformation of real-world processes while avoiding unnecessary regulatory burdens. You can think of an NFA as a digital document in your name. It’s personalized. If anyone else gets hold of it, it is useless to that party as they cannot claim any of its benefits or values. In the same manner, the NFA cannot be “lost.” Technically, you might forget or delete your private key. If that happens, you can simply create a new one. The old key will be blacklisted, and the new one will be authorized. Of course, it comes at a price. NFAs cannot be listed on exchanges. They are not freely transactable between anonymous parties and they are fully controlled by the issuer. As a benefit, however, they lower operational costs, allow the digitization of traditional paper-based processes, and enhance efficiency. What has been done with storage certificates of gold can be replicated with all imaginable real-world assets by simply mapping existing regulations for these assets and paper-based processes 1:1 to the digital realm. NFAs, therefore, offer businesses a way to leverage blockchain technology for more cost-effective operations while maintaining compliance with regulations.
Why is Gold a perfect use case for the NFA technology?
Gold has long been regarded as a reliable store of value and hedge against inflation. With a daily global trading volume of $162.6 billion, gold remains one of the world’s most traded assets. Retail and institutional investors use gold to diversify their portfolios, but the challenge of securely storing physical gold often serves as a barrier to entry. Finemetal has addressed this problem for decades by selling gold directly to investors and offering secure storage solutions in the Swiss Alps. The traditional process is manual and involves paperwork, phone calls, and bank transfers. Those who store the gold with Finemetal do so for extended periods. There is no high-frequency trading and no need to cater to a digital portfolio’s rapid buying and selling operations. Customers trust Finemetal, and the availability of the gold in the bunker can always be proven. With NFAs, the whole process can be made more efficient, and buying and selling can be done around the clock without needing office hours.
The Core Benefits of NFAs Powered by TEOS
CoreLedger’s Token Economy Operating System (TEOS) already powers a wide variety of use cases, using a unique stack of on-chain and off-chain functions and features such as documentation, accounting, governance, and trading. TEOS is offering several key advantages over traditional tokenization platforms:
- Not a Token: While TEOS allows you to create all kinds of Tokens (Fungible, Non-Fungible, Fragmentable Non-Fungibles, etc.), it also allows you to create other kinds of artifacts on blockchain that are not constrained by the corset of existing regulation. In other words, if minting a Token for something that doesn’t need one lands you in hot water with the regulator, then TEOS is the perfect alternative.
- All degrees of governance: NFAs as personalized storage certificates are the prime example of a highly centralized asset with full control by the issuer. At the same time, TEOS allows for the creation of fully decentralized assets with zero control by the issuer. The TEOS protocol is highly versatile and allows for creating anything between full and zero control.
- Unique Algorithms for Digitization and Automation: While TEOS offers many distinct features superior to existing Tokenization platforms, one outstanding element is the TokenWARP® Technology, a patented DeFi algorithm. NFAs are digital representations of formerly paper-based arrangements. Using TokenWARP allows the digitization of the storage certificate itself and all kinds of individual arrangements between parties, such as convertibility.
Through CoreLedger’s Token Economy Operating System (TEOS), businesses can leverage blockchain technology to streamline operations, reduce overheads, and improve security. The NFA is an example of the many things that can be built on TEOS.
Conclusion
Non-fungible assets (NFAs) offer a powerful, innovative solution for digitizing real-world assets without triggering securities regulations. They can be applied to tangible assets such as precious or industrial metals, gems, artwork, real estate, or shares, provided that they are constrained to the functionalities and utilities of the current business process. As the digital economy grows, NFAs represent a crucial advancement in bridging the gap between physical assets and 24×7 access to them, utilizing blockchain technology for digitization.
