Bitker Institute: Operational guidance for asset tokenization

Disclaimer: This article was compiled by Bitker Research Institute. The Bitker Institute focuses on the research of vertical fields such as blockchain industry theoretical research, cutting-edge technology, and secondary market analysis.

As the crypto asset market matures, attention is shifting from the initial ICO and utility tokens to STO and securities tokens. From the speed of this industry focus shift, I think we will be the next hot word in the next few weeks (in fact, the enthusiasm for tokenized assets seems to have subsided).

Now let’s see how asset tokenization actually works.

 “The idea that some existing tokens will be treated as securities is not at all interesting. But it is exciting to tokenize these assets.” – Nils Veenstra (published in Forbes)

1. The benefits of tokenization

Asset tokenization simply means using digital currency to prove the ownership of real assets, and it is beneficial to speed up the process of buying and selling securities.

The tokenization of an asset or the use of real assets to support the value of the token, opening up the potential investor base of the token to the wider market, this model increases liquidity compared to traditional securities, and Shortened the time required for trading.

1.1. Faster trading

Each transaction is executed by a smart contract, which triggers an algorithm on the blockchain through a number of operations, which eliminates the labor costs of processing the transaction and reduces the time and cost of purchasing or selling the asset.

1.2. Transparent

Information can be embedded directly into the securities token. This means that if you are a token holder, all your rights as an investor and who has a token in the past will be recorded and cannot be changed.

1.3. Low threshold

Compared with traditional financial instruments, the threshold for investment in tokenized assets is low, so they have a larger potential customer base. They are also separable, which means you can have fragmented tokens.

It seems that more and more companies come to me every week, hoping to tokenize their assets. Sometimes the value of the token is linked to goods such as gold or silver. Sometimes through more creative efforts, such as the use of tokens to represent the ownership of the cargo ship.

By consulting how these companies best perform the tokenization process, I noticed that they tend to use the same steps, in large part because they lack an understanding of the process itself.

Most companies that have communicated with me have collected a lot of the necessary information, and I find that people will encounter obstacles starting from step 3 below.

To help alleviate this problem, let us determine the steps that must be taken to tokenize the asset.

2. Overview of the STO process

(1) Identify an asset;

(2) Asset evaluation and confirmation;

(3) Smart contract generation, token and token platforms;

(4) Equity or cash flow;

(5) Law firm registration (or registration A or registration A+) (2-3 months);

(6) Once the registration is successful, you can start selling tokens to investors.

2.1. Identify assets

The first step is to find widely traded assets such as gold, silver or diamonds. The asset already has a trading market, and if it does not, it must be audited by an audit or accounting firm.

For example, if someone is tokenizing a ship, it may require an assessment of the value of an accounting, banking or consulting firm (Deloitte).

2.2. Valuation

Once the audit is complete, a smart contract must be created. The price and quantity of the token should correspond to the price and valuation of the asset.

If such assets are already widely traded like gold and silver, not valuations, it is not difficult, because there is already a market for trading such assets, so it is easy to determine their value. If you are crediting an asset that does not have an existing market, you will need to contact the audit company to determine the value of the token.

The audit company can be a law firm, an accounting firm, a bank, and a general consulting firm such as Deloitte or PricewaterhouseCoopers. The higher the credibility of the company that audits your tokens, the higher your valuation.

2.3. Smart Contract Creation / Token Economy

This is the simplest and most difficult part of the process. It’s simple because if you don’t want to write your own smart contracts, there are several ways to generate smart contracts. I recommend working with a company like Polymath or gosecsecure to generate a contract instead of doing it yourself or looking for it on the Internet – in fact, never use the smart contract you find on the Internet…

When generating a smart contract, you must determine how many tokens will be generated and how it will be distributed to interested investors. In the long run, the supply of tokens is likely to determine the survival of tokens. Excessive supply will scare off investors because they fear that there will not be enough demand to match such high value, too low supply will result in too low liquidity of the token. These issues are very common when dealing with practical tokens.

2.4. Is equity or cash flow?

Determine how you will be on tokenized assets, whether you offer equity or profit dividends/cash flow.

For example, if I want to tokenize a farm, I have a few different options.

2.4.1. Equity-type tokens

I can set the value of my new token to a specific interest on my farm. In this scenario, I will generate 100 tokens, which together represent 50% ownership of my farm. When a new distribution agreement is reached and eventually sold, the token holder will benefit as the capacity increases. This form of tokenization is similar to a company’s traditional stock, and you have a symbolic stock no matter what you invest in.

2.4.2. Profit Dividend/Cash Flow Token

Or, I can issue 100 tokens and anchor their value to some of the profits generated on my farm. For example, each token can represent a 0.5% profit generated—in this case, the token holder derives value from the profit generated by the asset, rather than the value added of the asset itself.

2.4.3. Classified as Reg D

When registering a securities token, Reg D (506c) is the best choice unless you are submitting a stock registration document (such as an IPO). There are several different versions, but Reg D or Reg A allows people to invest as quickly as possible.

There are many benefits to using Reg D (506c), but the SEC is the best, so I extracted some important content from their website.The company can sell its securities to an unlimited number of “qualified investors” and up to 35 other buyers. All non-qualified investors, either alone or with the buyer’s representatives, must be experienced, that is, they must have sufficient knowledge and experience in finance and business to enable them to assess the benefits and risks of future investments.According to Section 506(c), the company can widely solicit and publicize the sale, but it can still be considered as eligible for exemption under the following circumstances: the investors in this issue are qualified investors; the company takes reasonable steps to verify Investors are qualified investors, including review documents such as W-2s, tax returns, bank and brokerage statements, credit reports, etc.

2.4.4. Finding investors and selling tokens through brokers/distributors

If you want to trade it within a year, you must submit a shared space file. If you wait a year, you can start it on a stock exchange. Either way, you need to get a broker/dealer license, which will cost you a lot of money.

The broker/dealer is regulated by the Securities Exchange Act of 1984 and is required to execute the process of buying and selling new securities. They have several different ways of compensation, and in my experience, usually through a fairly high percentage of fees.

2.4.5. Distributing tokens

How to distribute tokens depends to a large extent on the token itself and the tokenized assets. Maybe you only need to distribute it to a small number of certified investors, in which case it is not too difficult. If you plan to have several shareholders, you can add a few steps in the process, but you need to consider compliance. I highly recommend that you seek legal counsel in the process, the most important of which is the last three steps of the process.

2.4.6. Tokenization process checklist

Although I hope that you can find value and fun in this article, I am a realist. You may just have a look at the title, then click on “Share” to show your colleagues how smart you are and then stop reading.

If this is the case, here is a summary.

2.4.7. In case you are too lazy to read this article

1. Find a legal service provider to complete your SEC file.

2. Create all the necessary internal and external documents: Build your product referrals, videos, PR, graphics, social media accounts, and ads.

3. After the listing, the investor can purchase your token or other legal securities, and the investor deposits the money into the custody.

4. If you are in the process of selling a Reg D 506C token, the issuer must ensure that its investors are certified.

5. Submit Form D to the SEC, which allows you to not be eligible for the SEC.

Figure 1 Reg D STO timeline

The process of tokenization is not complicated, but it is frustrating. You will spend a lot of time waiting for the parties to piece together what you need. It’s quite possible that when you complete this process, there is no market for your tokenized objects.

Source & Original Link (Click): Bitker Research Institute


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