Tokenization is an important FinTech innovation that emerge as an outcome of the development of the blockchain. In its simplest form, tokenization allows physical or virtual objects and assets to be represented as digital units or ‘tokens’ on the blockchain. Tokenization removes barriers of jurisdiction or intermediaries, leading to friction-free management of these assets.

The mechanism of Smart Contracts enables token operations to be automated and be used flexibly (for instance, for fractional ownership of a high-value asset which can later be sold or transferred). Many classes of assets from equity to real estate to automobiles can be tokenized, opening up significant potential for innovative services.

There two main ways to categorize tokens: based on their use or their fungibility. Going by use, the two main tokens are Utility tokens and Security tokens. Utility Tokens represent a value of money that can be utilized or redeemed at a later time. These usually are limited to a specific purpose and cannot be traded on an exchange. Security tokens, on the other hand, represent a legal ownership of an asset that can be physical or virtual and can be traded on exchanges.

Based on fungibility, tokens are classified as fungible tokens or non-fungible tokens (NFTs), with the former being the most common type. There is lately a surging interest in Non Fungible Tokens (NFTs) which represent assets that are one-off or unique. From the beginning of 2021, NFTs are increasingly used to commodify one-of-a-kind “Collectibles” that are digital assets from sports, music and art.

Tokenization provides several advantages including reducing/removing intermediaries, fractional ownership, faster transactions, and the immutability advantage of the blockchain. There are also several challenges associated with them such as cybersecurity issues, lack of common standards, and most importantly, the lack of regulatory compliance.

In summary, the Token-over-cryptocurrency model has has several advantages, but has a major flaw in that it does not comply with regulatory regimes. TransCognit seeks to create a token platform over CBDCs, which will ensure that the advantages of tokenization are available with full regulatory compliance.