CarderPlanet
Professional
This article will consider what tokenization is, examples and prospects of its use in various areas of information technology, in the global economy and in Ukraine.
If you think about it, money itself is just universal tokens with no intrinsic value. However, they are a necessary medium for the exchange of values, goods and services.
Many people regularly use tokenization without realizing it, mainly when paying for goods and services on the Internet with a payment card and using Apple Pay or Google Pay. It is easy to think that encryption is used here - that is, that the card number, expiration date and CVV are encrypted and transmitted from the seller to the bank along with the amount. However, it is the tokenization of the card that is used, and instead of the data itself, a token is sent - a set of characters corresponding to the payment data.
Encryption implies the transfer of confidential data, transformed using a code (i.e., the rules for this transformation, for example: A = 1, B = 2), which the sender and the recipient have. And during tokenization, confidential data is not sent, but remains in the application on the cardholder's device and on the bank's servers. The token can either be reused or generated anew each time. One way or another, the bank knows which card corresponds to which code and can confirm the transaction.
Tokenization does not negate the benefit of encryption, it is necessary when storing confidential data, however, tokenization avoids the direct transfer of personal data where possible, and using both approaches makes the transaction process even more secure.
Thus, a token can now be an asset (including digital), digital or fiat currency, stock, ownership, copyright, customer bonuses, or discounts. You can use tokens to track votes or user ratings, for medical records, and in general for any registries and databases.
The token has been used as a way to confirm crypto payments (which works in the same way as card tokenization) since the appearance of Bitcoin in 2009. However, already in 2015, on the basis of Ethereum, it becomes possible to create more complex applications suitable for any transactions and transactions (smart contracts), the rules of which can be clearly and unambiguously described mathematically. With the help of such algorithms, it is possible to automate processes that take into account the interests of the seller, buyer, intermediary, contractor, investor, author and other parties.
One of the key principles in the development of Internet services is the struggle for the place of an intermediary. Most of the successful businesses simply took over pre-existing markets. Amazon replaced shopping, YouTube and Netflix replaced TV and video rentals, and Uber took a large share of the taxi market.
But here a new problem arises: the larger and more successful the service is, the more it turns from an intermediary into a market owner. He can dictate his terms and charge as much as he wants for his services, and often both clients and contractors are dissatisfied, in a word, everyone else.
And it is at this moment that the blockchain comes - the principle of a decentralized platform, on which any service can be made simple, cheap, honest and transparent, the main thing is the desire and a suitable legislative framework.
During the 2017 cryptocurrency boom, almost every crypto startup had its own ICO (initial coin offering). The projects promised investors huge profits, and in most cases, in fact, they were just tokens for internal use, not backed by anything other than the price of bitcoin and the hopes of entrepreneurs for success with its endless growth.
Therefore, after Bitcoin fell by 65% in just a month in January-February 2018, more than half of ICOs went bankrupt, since their tokens looked more like tokens than real assets.
Since then, in relation to serious investment projects, the concept of a security token has been increasingly used, that is, tokens as securities. Such an initial offer is called STO (security token offering), that is, tokens that either contain signs of securities, or are their digital counterpart, or are tokenized assets - that is, rights or part of rights to other assets, for example, precious metals, real estate, paintings and other property.
The advantage of tokens is obvious, since any property or investment can be divided into a huge number of tokens. This opens up new opportunities for the investment market, especially for small investors. This allows them to participate in this process without entering investment funds, as well as to trade assets in the secondary market according to a simplified scheme, which is also convenient for large investors. There are already examples of such real estate projects, such as the $ 30 million home in Manhattan and the fashionable St. Aspen Resort in the American ski resort of the same name. It also successfully tokenized and sold a third of the rights to Andy Warhol's 14 Little Electric Chairs for $ 1.7 million.
Tokenization can significantly simplify the investor registration procedure and reduce the financial threshold for participation, it becomes possible to create a securities market without a stock exchange. It also simplifies the process of registration, registration of ownership and other aspects of the transaction.
On top of that, information has become a value in its own right, through which tech giants like Google and Facebook generate billions of dollars in targeted advertising revenue from their free services. But users also give this information for free, along with the rights to use it.
Therefore, there is the idea of a decentralized social network based on Ethereum, in which users will have complete control over their data and can benefit from it themselves.
There are projects to tokenize health-related information such as personal health records and drug supplies.
According to Security Token Club estimates, at the end of 2018, assets worth $ 500 million were tokenized, and this amount will grow every year. Several countries like the UK, Germany, Italy, France and Japan have already aligned their legislation with the needs of digital assets. Malta is known as one of the most attractive jurisdictions for crypto and blockchain. Offshores like Cayman and Bermuda offer the same favorable conditions for crypto funds as they do for traditional ones.
The bill on combating money laundering in accordance with international FATF standards, taking into account crypto assets, was adopted in the first reading. Amendments to the document on public electronic registries were also submitted for consideration with the aim of introducing blockchain and, perhaps, the most important one - a bill on the introduction of a tax on income from cryptocurrencies and digital assets for individuals in the amount of 5% and excluding VAT. He introduces into the legal field such concepts as "cryptoasset", "virtual asset" and "token-asset". A similar bill was already put forward in September 2018 and was withdrawn from consideration a year later. However, the new minister of digital transformation Mikhail Fedorov calls the legalization of cryptocurrencies one of his main tasks., so there is a possibility that this time the “state in a smartphone” will also become a state on the blockchain.
But there are also barriers to the transition of the economy (that is, real assets) to the digital space. First, unlimited access to assets and the oversimplification of registering and closing accounts can lead to chaos. Secondly, there is still no single approach to tokenization, affecting many other nuances, such as asset management and distribution of roles, security, integration with traditional payment systems, etc.
So, in many aspects, government regulation will be necessary, and in a few years it is quite possible to expect the arrival of some kind of general consensus both among blockchain projects and in terms of their interaction with existing government institutions.
Tokens as a replacement for values
In a general sense, tokenization is the replacement of real values with conditional ones. Tokens were used in the British Empire from the 17th to the 19th century due to the lack of state currency. These were coin-shaped tokens that either replaced small coins, or were intended for the purchase of something specific, for example, lunch in a canteen, were made as medals or awards, and sometimes for fraudulent purposes.If you think about it, money itself is just universal tokens with no intrinsic value. However, they are a necessary medium for the exchange of values, goods and services.
Tokenization for security
From the point of view of information security, tokenization is a way to protect personal data using tokens - combinations of characters that are of no value to attackers.Many people regularly use tokenization without realizing it, mainly when paying for goods and services on the Internet with a payment card and using Apple Pay or Google Pay. It is easy to think that encryption is used here - that is, that the card number, expiration date and CVV are encrypted and transmitted from the seller to the bank along with the amount. However, it is the tokenization of the card that is used, and instead of the data itself, a token is sent - a set of characters corresponding to the payment data.
Encryption implies the transfer of confidential data, transformed using a code (i.e., the rules for this transformation, for example: A = 1, B = 2), which the sender and the recipient have. And during tokenization, confidential data is not sent, but remains in the application on the cardholder's device and on the bank's servers. The token can either be reused or generated anew each time. One way or another, the bank knows which card corresponds to which code and can confirm the transaction.
Tokenization does not negate the benefit of encryption, it is necessary when storing confidential data, however, tokenization avoids the direct transfer of personal data where possible, and using both approaches makes the transaction process even more secure.
Blockchain as a platform for Internet services
The emergence of the blockchain not only made it possible to combine the previous properties of the token, but also to assign a number of new properties to it, making it possible to expand the possibilities of its use for various aspects of the exchange of values and accounting for information.Thus, a token can now be an asset (including digital), digital or fiat currency, stock, ownership, copyright, customer bonuses, or discounts. You can use tokens to track votes or user ratings, for medical records, and in general for any registries and databases.
The token has been used as a way to confirm crypto payments (which works in the same way as card tokenization) since the appearance of Bitcoin in 2009. However, already in 2015, on the basis of Ethereum, it becomes possible to create more complex applications suitable for any transactions and transactions (smart contracts), the rules of which can be clearly and unambiguously described mathematically. With the help of such algorithms, it is possible to automate processes that take into account the interests of the seller, buyer, intermediary, contractor, investor, author and other parties.
Blockchain advantages
The main principle of the blockchain is decentralization, which helps to avoid the disadvantages of centralized management of a particular process or asset. Excessive centralization of government, from states and corporations to large Internet services, leads to bureaucracy, cumbersome systems, manipulation, uneven distribution of benefits and unequal decision making. Decentralization is capable of optimizing the system of any process and leveling the chain of intermediaries or fixing their income at an economically justified level.One of the key principles in the development of Internet services is the struggle for the place of an intermediary. Most of the successful businesses simply took over pre-existing markets. Amazon replaced shopping, YouTube and Netflix replaced TV and video rentals, and Uber took a large share of the taxi market.
But here a new problem arises: the larger and more successful the service is, the more it turns from an intermediary into a market owner. He can dictate his terms and charge as much as he wants for his services, and often both clients and contractors are dissatisfied, in a word, everyone else.
And it is at this moment that the blockchain comes - the principle of a decentralized platform, on which any service can be made simple, cheap, honest and transparent, the main thing is the desire and a suitable legislative framework.
Tokenization of the economy
Considering all of the above, we will consider examples of existing projects for tokenization of assets and other possible applications.During the 2017 cryptocurrency boom, almost every crypto startup had its own ICO (initial coin offering). The projects promised investors huge profits, and in most cases, in fact, they were just tokens for internal use, not backed by anything other than the price of bitcoin and the hopes of entrepreneurs for success with its endless growth.
Therefore, after Bitcoin fell by 65% in just a month in January-February 2018, more than half of ICOs went bankrupt, since their tokens looked more like tokens than real assets.
Since then, in relation to serious investment projects, the concept of a security token has been increasingly used, that is, tokens as securities. Such an initial offer is called STO (security token offering), that is, tokens that either contain signs of securities, or are their digital counterpart, or are tokenized assets - that is, rights or part of rights to other assets, for example, precious metals, real estate, paintings and other property.
The advantage of tokens is obvious, since any property or investment can be divided into a huge number of tokens. This opens up new opportunities for the investment market, especially for small investors. This allows them to participate in this process without entering investment funds, as well as to trade assets in the secondary market according to a simplified scheme, which is also convenient for large investors. There are already examples of such real estate projects, such as the $ 30 million home in Manhattan and the fashionable St. Aspen Resort in the American ski resort of the same name. It also successfully tokenized and sold a third of the rights to Andy Warhol's 14 Little Electric Chairs for $ 1.7 million.
Tokenization can significantly simplify the investor registration procedure and reduce the financial threshold for participation, it becomes possible to create a securities market without a stock exchange. It also simplifies the process of registration, registration of ownership and other aspects of the transaction.
On top of that, information has become a value in its own right, through which tech giants like Google and Facebook generate billions of dollars in targeted advertising revenue from their free services. But users also give this information for free, along with the rights to use it.
Therefore, there is the idea of a decentralized social network based on Ethereum, in which users will have complete control over their data and can benefit from it themselves.
There are projects to tokenize health-related information such as personal health records and drug supplies.
According to Security Token Club estimates, at the end of 2018, assets worth $ 500 million were tokenized, and this amount will grow every year. Several countries like the UK, Germany, Italy, France and Japan have already aligned their legislation with the needs of digital assets. Malta is known as one of the most attractive jurisdictions for crypto and blockchain. Offshores like Cayman and Bermuda offer the same favorable conditions for crypto funds as they do for traditional ones.
Tokenization of the economy
At the moment, cryptocurrencies and digital assets are not prohibited, but they do not have an official status. But in November of this year, the parliamentary union Blockchain4Ukraine submitted to the Rada three bills at once for the legalization of crypto and token assets, as well as for the implementation of the blockchain.The bill on combating money laundering in accordance with international FATF standards, taking into account crypto assets, was adopted in the first reading. Amendments to the document on public electronic registries were also submitted for consideration with the aim of introducing blockchain and, perhaps, the most important one - a bill on the introduction of a tax on income from cryptocurrencies and digital assets for individuals in the amount of 5% and excluding VAT. He introduces into the legal field such concepts as "cryptoasset", "virtual asset" and "token-asset". A similar bill was already put forward in September 2018 and was withdrawn from consideration a year later. However, the new minister of digital transformation Mikhail Fedorov calls the legalization of cryptocurrencies one of his main tasks., so there is a possibility that this time the “state in a smartphone” will also become a state on the blockchain.
What stands in the way of tokenizing the economy?
The digital asset market affects not so much the economies of individual countries as the global economy in general. Digital assets, by their nature, do not have to neatly fit into one or another jurisdiction, and regardless of the further fate of the legalization of cryptoassets, citizens and enterprises in Ukraine can find legal ways to participate in this market, whether they are entrepreneurs, investors, contractors or clients.But there are also barriers to the transition of the economy (that is, real assets) to the digital space. First, unlimited access to assets and the oversimplification of registering and closing accounts can lead to chaos. Secondly, there is still no single approach to tokenization, affecting many other nuances, such as asset management and distribution of roles, security, integration with traditional payment systems, etc.
So, in many aspects, government regulation will be necessary, and in a few years it is quite possible to expect the arrival of some kind of general consensus both among blockchain projects and in terms of their interaction with existing government institutions.
