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What is tokenization and the #1 caution you should take

Many investors still do not know what tokenization is about, but it is a matter of time to surrender to these assets that are already present in several negotiations around the world.

Tokens have grown in popularity in recent months for bringing more security, transparency and practicality to financial transactions. It’s such an important move that it even gained a name: tokenization.

Today, it is possible to tokenize different assets, from football clubs to works of art, through stocks, real estate, traditional assets and, of course, money. But, like every new thing, you need to deepen your knowledge and know all the details before entering to avoid possible problems in the future! Check out the main precautions for this increasingly important segment in the global scenario:

What is a token?

First, it is necessary to answer the fundamental question: after all, what does token mean ? In short, it is a digital representation of a real asset, that is, one that exists in the physical world. Basically, it’s a blockchain-based technology. able to digitize different assets and assets into “small parts” to facilitate their trading on the web.

Each token is governed by an intelligent contract, which will determine the specific operating rules for the scanned asset. In addition, those involving securities, such as shares, need to be regulated by competent public bodies.

As the possibilities for tokenization are varied, tokens are classified into categories according to their functionality and types of use. Currently, there are four major groups:

  • Security Tokens: is the main category, associated with movable assets, that is, those capable of generating income and representing the real possession of a good (or at least part of it). In short: the user intends to have some kind of financial return on their negotiation/acquisition. Stocks, real estate and other physical investments become security tokens. However, it is necessary to be careful, because they are subject to the legislation that governs financial transactions.

  • Utility tokens: as the English name suggests, it has some use. It does not necessarily have a monetary value. It is widely used within a specific ecosystem, such as retail, allowing users to purchase products or services through these tokens , such as discount coupons, engagement and loyalty programs, among others.

  • Governance Tokens: They do not necessarily take on a monetary value. It is used within a specific ecosystem, allowing a chain of employees and people to have a voice and to participate in decision-making within a company.

  • Equity tokens: are widely used in the corporate environment and work in a similar way to actions. With them, companies that need investment trade tokens that grant equity interest and entitle future profits. The rules, of course, are defined in smart contracts and help to enhance the search for financial resources.

  • Non-Fungible Token (NFT): Represents a unique digital asset that cannot be replaced, as is typically the case in financial trading. Thus, it is widely used as a marketing and protection tool for goods with intellectual property, such as works of art, patents and even participation in sports clubs!

What are the advantages of tokenization?

Two pillars ensure tokenization grows and becomes popular. The first one is greater liquidity for investors and companies. After all, negotiation is simple, fast and transparent, governed by an intelligent contract and with great returns for both buyers and sellers.

In addition, it is a more democratic form of investment, allowing users who are unable to invest in traditional assets to buy some tokens – there are modalities that are negotiated from R$50.

And what are the precautions?

Tokenization is in fashion because it digitizes different assets, but some precautions are necessary to avoid risks. Token trading may be simple, but ensuring this asset digitization is a complex technological process.

In order for a given asset to be transformed into a token, it is necessary to carry out a rigorous analysis of documents and compliance. Some categories need to be regulated by specific legislation. Therefore, be wary of companies that promise to tokenize everything and choose fintechs that have expertise and know-how in the area.

Cassio Krupinsk

CEO of BlockBR, fintech of digital assets and investments

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