The evolution of tokenization technology and its impact on institutional adoption

Asset tokenization is the process of converting ownership rights of an asset into a digital token on a blockchain. Tokenization can extend far beyond native cryptocurrencies, encompassing tangible assets such as equity, bonds, real estate or commodities, and intangible ones like copyrights or patents.

The benefits of tokenization could be transformative, enhancing liquidity by fractionating large assets into smaller, tradable tokens, allowing a broader base of investors to participate. It also increases accessibility, enabling participation from anywhere in the world, with compliance handled automatically in real-time.

Furthermore, tokenization could allow for greater cost efficiency as it significantly reduces reconciliation between intermediaries, simplifies settlement processes, and streamlines reporting with all information stored on the blockchain. Notably, tokenization also allows for real-time compliance checks, ensuring every transaction abides by customizable rules.

Standards

Standardizing the way that financial products are represented on blockchains is critical to drive wider adoption and to realize the above benefits. Without a standard, however, tokenized assets suffer from fractured liquidity and interoperability. If security tokens do conform to a single global standard, they can be used in new and innovative ways.

There are various standards that have been proposed for security tokens. The most widely adopted is ERC-1400, a Security Token Standard proposed by the same team spearheading the Polymesh Association.

The ERC-1400 standard is an Ethereum token standard specifically designed for security tokens, mainly focused on providing a framework for implementing compliance requirements.

Even if there are still open points such as on-chain settlement or identity management, ERC-1400 has provided significant utility for institutions and corporations interested in exploring tokenized assets. It provides a standardized way to issue, distribute, and manage tokenized assets on a familiar network, thus reducing the barriers to entry, at least for early experimentation.

Domain-Specific Blockchains

While ERC-1400 operates on Ethereum, a general-purpose blockchain, there's a growing trend and interest towards using domain-specific blockchains like Polymesh for tokenization. The primary difference is in the focus; while general-purpose chains can handle a wide variety of tasks, domain-specific chains are optimized for a particular use-case, in this case, security tokens.

When it comes to standardization, dedicated chains like Polymesh offer a more tailored solution, designed from the ground up to meet regulatory and compliance needs. 

Drawing from the experience of building ERC-1400 and ST-20, Polymesh has been designed specifically to address the unique challenges of tokenization. It brings product advantages such as a built-in settlement engine, flexible compliance modules, and integrated identity features, which are integral to handling regulated assets. In particular, Polymesh has a dedicated compliance and settlement engine, the former allowing for complex compliance rules to be built using boolean logic based on claims associated with investors identities, and the latter fully conforming to the SEC’s 3-step process removing the risk around unsolicited airdrops and ensuring compliant asset transfers.

As a 3rd generation chain, Polymesh uses the latest technology to provide state of the art stability and efficiency. Built on the Substrate framework, it leverages WebAssembly (WASM) for high performance, uses a nominated Proof-of-Stake (nPoS) consensus for security and decentralization, and provides a stable governance model for consistent upgrades. It also presents transaction fee advantages.

Real World Use-Cases

BNP Paribas CIB, for example, has already tested the ERC-1400 standard when energy giant EDF issued an ESG tokenized bond through BNP Paribas digital assets platform AssetFoundry. The success of this endeavor is leading BNP Paribas and other large financial institutions to explore tokenization more deeply, and especially purpose-built blockchains dedicated for regulated assets like Polymesh. 

“BNP Paribas is exploring the tokenization impacts and possible benefits via multiple experimentations,” said Julien Clausse, Head of AssetFoundry at BNP Paribas CIB. “For instance, BNP Paribas has used the ERC-1400 standard for security tokens, and we continue to test different technical solutions such as Polymesh amongst others."

Conclusion

Asset tokenization has the potential to transform the financial ecosystem by making it more efficient, automated, transparent, and accessible. While ERC-1400 has paved the way for experimentation, solutions like Polymesh which are specifically designed to handle the complexities of regulated assets may be positioned to lead the next wave of innovation. By leveraging the unique advantages of Polymesh's domain-specific chain, businesses can fully unlock the potential of tokenization.

Tokenization is here, and the tools to harness its power are readily available. For businesses and institutions considering entering this space, there's no better time than now to seize these opportunities. Through the right technology and platform, we can redefine how we transact and interact with all assets, leading to unprecedented levels of growth and innovation in the financial industry and beyond.