NYALA – a Germany based technology company specialising in blockchain technology and regulated custody solutions for crypto assets, is one of the companies pioneering the digital tokenization of assets in 2024.
Tokenization is the conversion of the ownership rights of various types of assets into digital tokens using blockchain technology. These digital tokens can then be traded on global digital platforms, to offer investors and other traders of often traditionally illiquid assets improved liquidity.
NYALA provides tokenization services across various asset classes, including investment funds, real estate, banking, SME crowdfunding, and ESG (Environmental, Social, and Governance) industries.
Understanding Investment Fund Tokenization
Collective investment funds typically pool money from multiple investors to invest in various assets or securities. The investors in the fund, in return, own shares of the fund’s portfolio holdings, which they can choose to hold or sell at a future date, subject to the guiding terms and conditions.
NYALA’s investment funds tokenization converts investment funds into small tokenized digital assets that can be traded on a distributed ledger, also known as blockchain; broadening the subject fund’s investment base.
This allows interested investors to purchase and own small fractions of desired investment vehicles, making investment opportunities more accessible. Common types of investment funds that can be tokenized include the following:
- Mutual Funds such as equity funds, bond funds, money market funds, and hybrid funds.
- Exchange-Traded Funds (ETFs).
- Investment Trusts.
- Hedge Funds.
- Real Estate Investment Trusts (REITs).
- Target-Date Funds.
- Commodity Funds.
- Liquidity Funds.
The resulting types of tokens in investment fund tokenizations above may include the following:
- Equity tokens.
- Asset-Backed Tokens.
- Non-Fungible Tokens (NFTs).
- Debt Tokens.
- Utility Tokens.
Impact on Liquidity
Tokenization makes entry and exit into such investment funds easier because of increased affordability and, therefore, demand, as opposed to if the investors had opted to directly purchase the security asset, for example, real estate. This greatly improves liquidity for investors and fund managers.
Effects on Market Efficiency
Other than the liquidity of assets, investors also need to take market efficiency into careful consideration when making prudent investment decisions. Inefficient markets are commonly known for numerous intermediaries and brokers who sometimes misprice assets and create higher costs in order to generate high returns for themselves.
Tokenizing fund units simplifies the trading procedure, ensuring prices are accurate and reflect the true price of the underlying asset, as well as removing any unnecessary middlemen and risk.
Challenges and Considerations
Some of the common challenges facing tokenization of investment funds include the following:
- Compliance with existing regulations in all the different jurisdictions can sometimes be challenging, for example, compliance with anti-money laundering laws and know-your-customer regulations.
- Many targeted investors are still not conversant with blockchain and distributed technologies. Educating such investors on the benefits and applications of this technology in investment fund tokenization is necessary.
- Additionally, as new digital technologies emerge, they attract significant cybersecurity threats from bad actors trying to profit from unsuspecting victims. These need constant monitoring, evaluation, and risk prevention.
Future Outlook
Analysts and consultants like Mckinsey agree that the future of tokenization of assets in general, will depend on whether relevant stakeholders, and early promoters like NYALA will get certain fundamental matters right. These include:
- The required blockchain technology infrastructure.
- Interconnectivity and integration.
- Ability to instantly settle transactions and requests, and solve arising issues.
- Generating adequate demand for the aforementioned capital products.
- Effectively navigating existing regulation and formulating new laws where necessary.
- Investor and other consumers’ education.
