June 3, 2022

Tokenization in Europe: Current state and future outlook

Tokenization is the new world order; it may only be a matter of time before everything is tokenized. The benefits are glaring, as tokenization can quickly multiply an asset's liquidity. According to the latest data from Security Token Market (STM), the global security token market cap finished at $19,140,395,800.00 for April, recording an increase of 543.76% from the previous month; STM tracks tokenized assets globally.

From the financial industry to Real estate and even healthcare, tokenization can significantly impact how businesses are run and how investors acquire assets. Although, tokenization in the blockchain is still limited by a lack of clear policy direction and harmonization of countries' regulations, particularly in the EU.

In the first place, what is Tokenization?

In the traditional financial and fintech industry, tokenization refers to the encryption and storage of sensitive data with a unique identification. For example, credit card details can be tokenized with some random characters while the last four-digit remain visible. Tokenization protects users' data from malicious elements in the event of a hack.

Tokenization is a different animal in the blockchain. It refers to the conversion of tangible or intangible assets into digital assets or tokens that can be owned, used, or transferred on the blockchain. This article aims to elaborate on Europe’s tokenization in light of the blockchain industry.

Benefits of Security tokens and Tokenization

Tokenization has created several possibilities. It allows organizations to raise funds quickly. People can invest and own digital assets or fragments of an investment without beating the odds of high capital requirements.

Let’s highlight some of the key benefits of security tokens

Higher efficiency and lower operating cost

Operating at maximum efficiency and cost reduction are the ultimate goal of any business. Security tokens eliminate the need for middlemen, cutting out delays and bureaucracy, which translates to cost savings. The blockchain guarantees transparency and reduced fundraising costs compared to the traditional funding rounds.

Improved transparency and compliance

The decentralized nature of the blockchain makes it one of the most trusted and guaranteed data sources, greatly facilitating record keeping. Security tokens can help the global financial industry achieve huge cost-saving from financial crime compliance which reached $213.9 billion in 2021, by encoding complex compliance rules into the token.

Facilitation of asset liquidity and Innovation

Since the blockchain is open to users globally, security tokens have a larger market base, so users worldwide can trade tokens on exchange marketplaces. Also, thanks to innovation, these tokens have a lower entry barrier allowing people to own tokenized assets in fractions rather than beating the odds of an outright purchase.

Tokenizable assets

When discussing assets that can be tokenized, we will refer to 2 major groups;

● Security tokens

● Utility tokens

First of all, Security tokens represent the digitized version of traditional investments consisting of Real estate, debts, equity, and stocks. Security token represents an ownership right in a company, and the holder can be regarded as a stakeholder.

Utility tokens do not confer ownership rights on the holder; it only gives users access to the network and is usually issued during an initial coin offering (ICO), for example, Filecoin and civic.

Now, let's discuss tokenization in Europe.

The current state of tokenization in Europe

The rules governing STO and tokenization vary from one European country to another. There is no harmonized regulation by the EU yet, but generally, the atmosphere has been positive as regulators see the innovative potential of tokenization. Germany is currently drafting laws to allow the recognition of assets as tokens. Some EU countries have specific requirements for enabling organizations to raise funds via STO (Security Token Offering).

Currently, the individual country laws, as well as the general EU securities rules and regulations, hold sway. For example, you do not have to register your offering unless you meet a threshold value that varies by country (5 to 7 million Euros). Also, for private placements, only accredited investors are permitted to invest.

BaFin, Germany’s financial regulator, approved security token offerings as regulated financial products back in 2019. In other European countries like the UK, France, Luxembourg, and Italy, securities laws may also apply to STOs if certain conditions are met.

We await the official European Union regulation on crypto-assets markets after a proposal was drafted in March 2020 during the commission’s consultation on crypto assets. It is expected that this regulation will complement the existing MiFID II, which regulates the traditional financial products and creates a synchronized digital asset market in Europe.

A report by Plutoneo and Tangany in May last year indicated that the market for tokenized assets is primarily dominated by cryptocurrencies (in terms of market capitalization), but security tokens are on the sidelines, waiting to take over the space. Also, regarding the market share of cryptocurrencies, about 40% of global crypto users come from Europe, but the continent only accounts for about 25% of market capitalization globally.

A secondary marketplace for trading security tokens exists in London; Archax is the first digital securities exchange regulated by the FCA- the UK financial industry regulator. Archax’s services include trading, investment, and custody of digital securities and assets.

Some notable successes of STO in Europe include Invesdor (formerly Kapilendo), a Europe-based financial leader that successfully raised about 2.3 million Euros for SME financing from 1300 investors back in 2019.

Bitbond, a token solutions provider, was credited with hosting the first German STO. This event ended in July 2019 and raised a remarkable 2.1 million Euro, although it fell short of its 3.5 million Euro target.

German Real estate company Vonovia also launched its security offering in 2021 with a volume of 20 million euros for an exclusive investor, M.M.Warburg & CO, who will resell the tokens to its customers.

Other organizations to have issued security offerings in Europe include Société Générale; a large investment bank that last year issued a security token on Tezos.

Future outlook of tokenization in Europe

It is also projected that security tokens will record an 81% growth in market volume between 2021 and 2026. Experts predict that the market volume of security tokens will exceed that of cryptocurrencies in Europe and grow to 918 billion euros in 2026 (including fiat-backed stablecoins).

Radoslav Albrecht, the founder of Bitbond, also corroborated this claim, predicting that tokenized securities will overtake cryptocurrencies and other unregulated assets in the future.

Roland Berger, a management consulting firm, also predicted that the tokenization of equity trading could lead to a significant cost saving of about 4.6 billion Euros by 2030 on the condition that the adoption rates are high.

In summary, the future of tokenization will depend mainly on EU laws. As we await the European Union regulation on crypto assets, we can say that the future outlook of tokenization in Europe looks promising.

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