Thursday, December 7, 2023

Precious metals and commodities

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Several examples demonstrate the efficacy of tokenizing precious metals and commodities:

Paxos and Tether platforms have issued PAX Gold and Tether Gold tokens representing ownership of physical gold bars stored in vaults. Each token is backed by one troy ounce of gold (approximately 31 grams). Similarly, Kinesis Money is a monetary system based on blockchain technology that tokenizes various precious metals.

Komgo is a platform facilitating a digital ecosystem for commodity traders, banks, and other stakeholders to conduct transactions more efficiently and transparently.

Like traditional ETFs these stablecoins solve storage issues for individual investors, but additionally provide global accessibility and charge lower fees.

Artwork and collectibles

The entry cost for premium art and collectibles investment is very high along with other challenges like authentication and transaction complexity. Several platforms solve these through tokenization creating new opportunities for artists, collectors, and investors.

Artwook and Maecenas are platforms that tokenize high-value artworks, enabling fractional ownership. Investors can buy and trade tokens, representing a share of the artworks listed on the platform increasing accessibility by lowering the barrier of entry of fine art investment.

Artsted is another platform for art investment, providing comprehensive artwork and artist analytics to predict forthcoming value and furnish valuable prospects for profitable investments.

Challenges and risks

Legal and regulatory considerations:

Tokenizing physical assets involves intricate legal and regulatory issues. Cross-border compliance is complex due to conflicting international regulations. Platforms must comply with AML and KYC regulations to preventing illicit activities by implementing robust identity verification processes.

Security concerns:

Despite their efficiency, smart contracts can have exploitable vulnerabilities, requiring thorough security audits and testing. Blockchain networks are susceptible to cyber threats, such as hacking, phishing, and malware.

Market liquidity and valuation issues:

Tokenization can boost liquidity but remains subject to demand and trading activity, affecting price stability. Valuing tokenized assets, especially illiquid ones like real estate or collectibles, demands robust price discovery mechanisms and reliable data sources. In this nascent market, speculative behaviour can trigger price swings unrelated to asset value, requiring a cautious, fundamentals-based approach. It’s crucial to address these issues through strong legal frameworks, secure protocols, and transparent market practices.

The future of tokenisation

Asset tokenization holds the potential to revolutionize the global economy in several ways by unlocking trillions of dollars in asset value. It could reshape how asset ownership are managed, eliminating intermediaries, reducing costs, and increasing transparency. As technology evolves, the potential use cases continue to expand. Intangible assets such as intellectual property, royalties could also be potentially tokenized and traded on blockchain unlocking new investment opportunities and transforming various industries.

(The writer, Umesh Bansode, is a functional architect at Maveric Systems)

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