Tokenization Process

The diagram provided below outlines the five phases of the tokenization process for Real World Assets (RWAs).

Asset Tokenization Process Source: https://assets.kpmg.com/content/dam/kpmg/sg/pdf/2024/02/kpmg-sfa-the-asset-tokenization-c-suite-playbook.pdf

Here's an explanation of each phase:

Phase 1: Deal Structuring

This initial phase involves setting up the legal and operational framework necessary for tokenization:

• Issuer: The entity that creates the tokens.

• Investment Manager: Manages the investment strategy for the assets being tokenized.

• Administrator: Handles administrative tasks and coordination.

• Auditor: Ensures compliance with financial and legal standards.

• Custodian: Safeguards the physical or digital assets underlying the tokens.

• Legal/Tax Advisors: Provide guidance on compliance with legal and tax obligations.

• Structure into SPV (e.g., VCC or Trust): The assets are placed into a Special Purpose Vehicle, like a Variable Capital Company (VCC) or a trust, to separate them from the issuer's main business.

• Underlying Assets: These are the actual assets (e.g., real estate) being tokenized.

Phase 2: Digitization

In this phase, the assets are converted into digital tokens on a blockchain platform:

• Tokenization Platform: The technological platform where tokens are created.

• Programmable Actions (Smart Contracts): These are self-executing contracts with the terms of the agreement directly written into lines of code.

• Digital Register of Members on Blockchain: A blockchain-based registry that records all token holders.

Phase 3: Primary Market

The tokens are initially offered and distributed to investors:

• Primary Distribution: Tokens are sold to investors, typically through private sales or initial coin offerings (ICOs).

• Investment Tokens: The actual digital tokens representing ownership or a claim on the underlying assets.

Phase 4: Corporate Actions

This phase involves the management and administration of the tokens post-issuance:

• Asset Servicing: Includes the management of underlying assets, ensuring they are maintained and operated efficiently.

• Coupon Payments, Dividends, Principal: Handling of financial distributions and repayments to token holders.

Phase 5: Secondary Market Trading

Tokens are traded among investors after the initial sale:

• Trading via OTC or Exchanges: Tokens can be traded over-the-counter or on various cryptocurrency exchanges.

• Ownership Updates on Digital Register: The blockchain register updates ownership information as tokens are traded.

These phases represent a comprehensive framework for the tokenization of assets, ensuring that the process is compliant, transparent, and efficient from initial structuring through to trading on the secondary market.