A Tokenized Future
Tokenization is paving the way for a more inclusive and efficient global economy. From real estate to art, from stocks to commodities, tokenization is democratizing access to assets and revolutionizing how we think about investment and value. We are excited about the role we play in this thrilling future and invite you to join this revolution that will change the way we interact with the financial world.
TOKENIZING NON-DIGITAL ASSETS, WHY? HOW?
(Extract summarized by Alfredo Muñoz García)
Many times, people ask me, why tokenize if we can already use the real-world asset (RWA) to trade or use it as collateral?
Tokenization allows, according to regulations, representing or incorporating rights over the RWA in a DLT, and thus, applying all the utilities or efficiencies of this technology through the token (fractionalize investment, facilitating access with small amounts; generate immediate liquidity; atomic operations, eliminating financial risks; use of smart contracts; 24/7 and cross-border markets; settlements in seconds; traceability; immutability; transparency; use of attributes in the token linked to ID; automation in the exercise of tokenholder rights and assurance of compliance with some of their obligations; on-chain collateralization; etc.).
We can do everything that is already feasible today with the underlying asset, but we can also take advantage of the benefits that DLT technology, in general, and Blockchain, in particular, allow us to enjoy
So, if tokenization is beneficial for RWAs, how do we do it?
Here the answers are more complex, and in all cases, they are determined by applicable regulations, which require some considerations (I outline them without exhaustiveness, merely illustrative, and, notwithstanding, indicating the need to analyze each case):
Determine the applicable legislation internationally – under which legal system does the case fall? Once determined, it may be that in that specific jurisdiction there are no special rules on crypto-assets, but if a legal system applies, it must be done even if it lacks express regulation on the matter, and therefore, we must identify which rule to apply.
Establish what is the legal nature of the underlying asset and, with that, what type of crypto-asset we are dealing with (monetary, security, utility, NFT, etc.), which can lead us to delimit the specific applicable rule (for example, in the EU, a financial instrument would be regulated by MiFID and the Pilot Regime – in Spain, additionally, by LMVSI – while if it is not, except for exceptions, it would fall under MiCA).
Apply the regulation for the transmission of tokenized RWAs, whose regime cannot be ignored if we want to produce that transfer of ownership effect that is initially intended with the tokenization of these types of assets. And, I never tire of saying it, if the RWA is in a legally-binding register, comply with the requirements required to have effects against third parties.
Satisfy the regulatory requirements of AML.
TOKENIZATION: OWNERSHIP AND POSSESSION
There is a concerning trend to confuse ownership with possession in the case of tokenizations. Possession of the TOKEN, the keys to the Wallet, control over the underlying through its tokenized representation, is just that, possession.
To acquire ownership, it is essential that the prerequisites established in each jurisdiction are met. In countries with a Latin influence, we need to satisfy the requirements of the theory of title and mode (a legal transaction and a mode of delivering the asset that serves as traditio). Therefore, it is not enough to deliver or acquire control of the digital asset to be the owner of the underlying asset.
In addition, to acquire an asset in good faith from someone who is not its owner, it is essential for the legislator to grant the corresponding protection, recognizing acquisitions a non domino, based on criteria of appearance and traffic protection. This is the case in Switzerland for tokenizations in general or in Spain for tokenized securities markets.
And it should not be forgotten that if the underlying asset is in a legal register and not merely administrative, to have full effects against third parties, erga omnes, access to the register is essential, and the corresponding publicity effects must be deployed. This is the case in Spain with property registries or ledgers as provided by the LMVSI.
Control of the digital asset implies possession of the TOKEN but not necessarily ownership or possession of the underlying asset.
There is a concerning tendency to confuse ownership with possession in the case of tokenizations.
The possession of the TOKEN, the control over the underlying asset through its tokenized representation, is just that, possession.
To acquire ownership, it is essential to meet the requirements established in each jurisdiction. In countries with a Latin legal tradition, we need to satisfy the requirements of the theory of title and mode (a legal transaction and a mode of delivery of the asset serving as traditio). Therefore, merely delivering or gaining control of the digital asset is not sufficient to become the owner of the underlying asset.
Furthermore, to acquire an asset in good faith from someone who is not its owner, it is essential for the legislator to grant the corresponding protection, recognizing acquisitions a non domino, based on criteria of appearance and protection of commerce. This is the case in Switzerland for tokenizations in general or in Spain for tokenized securities markets.
It should not be forgotten that if the underlying asset is in a legal registry and not merely administrative, to fully assert effects against third parties, erga omnes, access to the registry is essential, and the corresponding publicity effects must be deployed. This is the case in Spain with property registries or ledgers, as stipulated by the LMVSI.
Control of the digital asset implies possession of the TOKEN but not necessarily ownership or possession of the underlying asset.
TOKENIZART, a disruptive NFT model that solves the problem of Physical Assets
Perhaps the concept of NFT is broad, strictly linked to a speculative world, and even poorly understood.
Moreover, when attempting to relate or explain it in terms of pre-existing assets in the physical world.
TokenizArt is a platform that goes beyond including all types of tokenized art (physical and digital); its disruption to the Blockchain market has been achieved with its set of tools and functional architecture, unlocking the complexity of tokenizing underlying assets (physical world assets) that even existed without the need for an NFT to represent them. In other words, we have stood out and specialized in physical NFTs or NFT Physical Assets, so we want to present and let you know from this perspective what NFTs are, the new concept dominating the technological world.
Preliminarily, we can say that NFTs can be virtual assets (e.g., crypto art) or representations of an existing physical asset (RWA) REAL WORLD ASSET, which are linked or associated to improve their identification to a standardized system, to a non-fungible token.
These assets are assigned a unique ID to maintain their singularity and indivisibility inherent to NFTs.
NFTs in general are known as “non-fungible tokens,” which are blockchain smart contracts that inherit the singularity, uniqueness, and rarity (in the sense of scarcity) of their digital or real-world asset, and precisely facilitate the verifiability of this scarcity for everyone. This tokenization is a technological tool that ensures authenticity and ownership proof recorded on a blockchain to register each and every transaction related to the underlying asset it represents.
This concept of physical NFT will greatly assist numerous artists, creators, and many other professionals in generating opportunities to monetize their work and, at the same time, act as an excellent aid in collecting unique or rare items.
Physical asset, another way to view NFTs
Blockchain in general and NFTs in particular are starting to flourish in our society; they are revolutionizing the concept of trust in a third party without the involvement of an intermediary. People claim property rights and authentic identity or any fraudulent transaction that has occurred regarding their assets.
Users and holders should always remember that these tokens can record the digitized version of the physical asset in any market, and generating the NFT will eventually give full ownership to the buyer (if stipulated as such). Since the NFT cannot be altered, the claim of ownership can even be used as collateral to obtain a loan in a specific lending scenario.
What is a physical NFT artwork?
A physical NFT artwork (Non-Fungible Token) is a token representing a real-world physical artwork, facilitating traceability, the incorporation of history, and successive transmissions.
What do we need to ensure a physical identity for an NFT?
NFTs are commonly used for purely digital art, which in no way prevents them from being linked to existing physical objects. However, they do require a different and more complex technical, legal, and technological architecture.
The life of the artwork, its sale, transmission, storage, and transportation are entirely different. In other words, different needs require different or at least complementary solutions. Among them is the proper linking and identification of digital identity to the physical one, and that this link is secure, unalterable, and traceable.
TokenizArt’s physical NFTs are efficiently linked to physical works of art or other unique objects. Therefore, their ownership cannot be transferred like any other 100% digital NFT.
First and foremost, they require adaptation to the existing legal framework to ensure transmission, the “TRADITIO,” consisting of the TITLE and the MODE.
This requires the CUSTOMIZATION OF SOLUTIONS TO BE SUITABLE for a physical object. TokenizArt solves this with a chip equipped with NFC technology programmed to measure and need to authenticate the article, linked through an app that you need to download to interact. Ensuring the PHYSICAL-DIGITAL connection.
In this chip, we encode a unique and secure link to the NFT through an interaction in the Blockchain of the Smart contract called “certify chip” or “Linking with NFC.” The system is linked to the physical artwork and interacts with the descriptions and photos incorporated into IPFS (the decentralized file that ensures, in its metadata, the data hosted in an immutable manner).
How should a physical NFT be transferred or sold?
Customized solution. Physical and digital unity. Linking the digital NFT to the physical artwork.
A common mistake people make is assuming that an NFT can exist and be traded along with the physical asset in the same way as digital art.
A system allocating a DIGITAL ASSET to an underlying physical asset requires a customized solution to the specific needs of a physical artwork.
Firstly, it is not possible or at least impractical to automatically swap (atomic exchange) an NFT of a physical artwork for a token (cryptocurrency), as we can do with crypto-art, where the underlying asset (the artwork) is also digital.
Or, at the very least, it makes the process incomplete or lacking self-sufficiency for transmitting or exchanging physical goods.
Digital art, its simplicity.
Digital art, which is born, lives, and is stored entirely in cyberspace, in databases, IPFS, etc., makes its transmission or purchase easy, practical, and self-sufficient through simultaneous and atomic exchange (at the same time and in one act) between buyers and sellers, in exchange for cryptographic value.
Complexity of physical art.
In contrast, physical art will likely have previous, intermediate, and complementary steps to ensure the physical transmission and delivery of the artwork.
Without a doubt, it will require oracles to ensure and coordinate the linkages between the physical and the digital, the data that runs off-chain with the on-chain. They will also need to accredit the veracity of the artwork, its state of preservation, agree on its delivery, transit, custody agents, accompany contracts, supporting documentation, etc. In other words, they must generate all the dynamic probative burden that ensures the legitimacy of the asset, its acts, certifications, and related authentications.
For this, it will require an ad-hoc infrastructure, totally customized and linkable to all operations, which ensures not only on-chain traceability (verifiable on the blockchain) but also ensures payments, transfers, guarantees. To achieve this, at TokenizArt, we have an Escrow Service system, which facilitates different actions, such as keeping the ownership of the artwork blocked until the physical delivery of the asset is effective.
Likewise, it facilitates the autonomy of the parties’ will in stipulating milestones, clauses, payment methods, currency, or chosen payment instrument (it is undeniable that physical art continues to use fiat currencies, with cryptocurrency payments not being common). Tokenizart takes all this into account, and we have conducted a meticulous study of the needs and practices in the art world.
It is also essential to link and ensure that “Virtual Asset” to the artwork or physical asset, a technological tool that binds digital identity with the underlying asset, in addition to elements that deter and discourage chip extraction. At TokenizArt, we solve this with NFC technology and labels with VOID security holograms.
Complementary tools to ensure the function of the NFT as a property title
At TokenizArt, we know that we are providing disruptive tools, even within the Blockchain world and the basic usability of NFTs.
We offer customizable solutions that facilitate the traceability and linking of physical artworks with unique ID-created Digital Assets, improving and optimizing the life of artworks and the art-related world, linking it to the financial and fitting it into decentralized finances like “LEGO” pieces. Ensuring the interoperability of assets, platforms, and protocols.
Highlighting the fundamental value that should guide projects seeking real innovation and lasting in the pursuit of disruptive avant-garde is “Composability.”
COMPOSABILITY is a system design principle that deals with the interrelationships of components. A highly composable system provides components that can be selected and assembled in various combinations to meet specific user requirements.
Adherence to clear rules and the spirit of the project.
Terms and conditions / Disclaimers.
To ensure that assets have been ‘tokenized’ or ‘minted’ by their owners or legitimate possessors, representatives, etc., and that they understand the scope of establishing the NFT as a virtual certificate and title representing the underlying asset, we have created manifestos that those intending to take actions must subscribe to.
Therefore, mandatory disclaimers and declarations of will have been stipulated, which individuals must subscribe to, first of all, when logging into the platform, where they must complete KYC data, linking identities.
Secondly, when interacting with the decentralized application (DAPP) called ‘ATELLIER,’ users and validators are required to give their consent to TokenizArt’s terms and conditions by signing with their registered wallet and validating their actions.
Within the terms and conditions, it is specified, “… By minting an ID on the ‘Tokenizart.com’ platform, Smart contract: … (Gnosis Chain – formerly Xdai Chain), you are creating a digital property title for the associated underlying asset, whether physical or digital. Thus, granting you the status of owner or legitimate holder of the associated and linked asset and transferring the ownership when you transfer it. There is a presumption that what is being transferred is ownership of the asset. Additional certification may stipulate any other type of instrument that precisely defines the scope of the title it holds and transfers.
You accept, under oath, that you understand the scope of this ASSET and become solely responsible for the authenticity and ownership of the associated asset, whose data and photos are stored in IPFS. The undersigned acknowledges and accepts being solely responsible for falsehoods or illegitimacy of the associated asset. TokenizArt issues this Disclaimer because it is a technological platform that provides users with tools facilitating the integration, digitization, and tokenization of artworks; the inclusion of holistic data and documentation.”
(Insert screenshot)
Thirdly, when ‘minting or tokenizing’ the artwork (assigning a unique and non-repeatable ID that links to the physical artwork), a clause called ‘Acceptance Manifesto’ appears, ‘I hereby declare… that I am creating a certificate of ownership title for the underlying physical or virtual asset on the blockchain in the GNOSIS CHAIN – formerly Xdai Chain, and I am authorized to do so as either the owner or by being entrusted with this act as a representative of the legitimate owner.’
Moreover, there are additional functions to link different types of certifications, add supporting documentation, where owners can submit notary documents, certifying titles, valuations, other binding property titles that will facilitate and ensure the validation and linking of the NFT with the physical artwork.
TokenizArt provides truly innovative tools that facilitate the entire life of art, including the active participation of validators, experts, curators, gallery owners, institutions, ensuring verifiability not only of documentation but also ensuring the identity of those interacting, eliminating fraud.
We have also understood that an excess of supporting documentation will further improve and ensure the legitimacy and authenticity, not only of the artwork but also its connection with the one ‘minting‘ (coining) it. Given that the system is truly novel and under the axiom ‘abundance does not harm,’ we prefer redundant registration and recommend, especially for artworks of considerable pecuniary value, that every ‘transfer’ of ownership be accompanied by sufficient supporting documentation and be carried out through the ESCROW SERVICE modality that we provide, where the parties, freely choosing an agent without custody, ensure their transfer under particularly agreed conditions, ensuring aspects such as transportation, payment terms, custody, delivery of the asset, warranty system, and additional provenance.
Why is it so important to implement a suitable technological and legal architecture?
In practice, unless the physical asset is kept under custody, it will be challenging to track both the physical artwork and the digital NFT. For instance, you might buy an NFT online, but in the meantime, the owner of the physical asset may have sold it for cash without updating the digital record. It is fair to assume that without a trustworthy custodian for the physical asset, ensuring that the physical art and the digital NFT stay synchronized is impossible.
Therefore, we have two options:
Place the physical asset under custody with a trusted custodian while the digital NFT is in operation, so the custodian commits to delivering the physical artwork to the NFT owner on agreed terms.
Alternatively, we can harness the full potential of Blockchain technology and lock the ownership of the NFT in a specific smart contract, which is not temporarily owned or possessed by a third party or the parties involved. Instead, it remains secure in a waiting room until the previously agreed-upon milestones are met. For example, payment, transportation, insurance, delivery, etc.
Regardless of the approach we choose, a particular method of safeguarding and ensuring physical delivery will be necessary. As we explained above, an automated or atomic swap sale is impractical.
Physical art, while benefiting from blockchain, requires customizable solutions. At TOKENIZART, we have implemented an independent escrow service system that ensures the delivery of the artwork by milestones, including attaching documentation and facilitating payments and deliveries as bilaterally agreed upon by the parties.
Why do NFTs of physical artworks add value over traditional physical artworks? Why would someone want to create a tokenized version of a real-world asset?
Simple Trading
Tokenization, due to its traceability and the uniqueness it ensures, simplifies the process of selling or transferring an artwork and its associated rights. It allows for transparent management, ensuring even the establishment of fair and objective prices.
Availability
An NFT can be bought at any point and sold at any time. While a traditional artwork may change hands every few years or decades due to the need to inspect and transport the physical item, an NFT representing ownership of the physical artwork can change hands instantly multiple times in a day or hour with different owners worldwide.
Liquidity
When selling a traditional artwork is restricted to auction house clients, anyone with a cryptocurrency wallet can buy or sell an NFT. This opens up pieces to be traded among a much broader global group of buyers and sellers.
Logistics (or lack thereof)
Transferring high-value physical assets is complicated; the process typically involves some or all of the following milestones: shipping, insurance, escrow for funds, a dispute resolution process. Transferring an NFT even for physical art improves the sales dynamics, if not instantaneous.
Fraud Protection
Fraudulent copies of sold artworks are a significant issue with physical works. Once the artist’s private key ownership is established (for example, the artist has published their public key publicly through a reliable source), the blockchain provenance of the NFT for the artwork will be very difficult to undermine.
Collateralization
Supported by Tokenizart’s Escrow Service, you can use the artwork as collateral to secure any other type of transaction, without needing to remove it from where it is displayed. You can secure any type of operation even without custody, leveraging secure, efficient, and economical collateralization. You can implement it in minutes, as opposed to the days or weeks of traditional systems.
How should a physical NFT be transferred or sold?
Customized solution. Physical and digital unit. Linking the digital NFT to the physical artwork.
A common mistake people make is assuming that an NFT can exist and be traded alongside the physical asset in the same way as digital art.
A system assigning a DIGITAL ASSET to an underlying physical asset requires a customized solution to the specific needs of a physical artwork.
As a first point, it is not possible, or at least, it proves impractical in practice to automatically swap (atomic exchange) an NFT of a physical artwork for a token (cryptocurrency), as we could do with crypto-art, where the underlying asset (the artwork) is also digital.
Or, at the very least, it makes the process incomplete or lacking self-sufficiency to transmit or exchange physical goods.
Digital art, its simplicity.
Digital art, which is born, lives, and is stored entirely in cyberspace, in databases, IPFS, etc., makes its transmission or purchase easy, practical, and self-sufficient through simultaneous and atomic delivery (at the same time and in the same act) between buyers and sellers, in exchange for cryptographic value.
Complexity of physical art.
In contrast, physical art will likely have preliminary, intermediate, and complementary steps to ensure the transmission and physical delivery of the artwork.
It will undoubtedly require oracles to ensure and coordinate the links between the physical and digital, the off-chain data with the on-chain. It will also need to accredit the veracity of the artwork, its state of preservation, agree on its delivery, transit, custodial agents, accompany contracts, supporting documentation, etc. In other words, it will need to generate all the dynamic probative burden that ensures the legitimacy of the asset, its acts, certifications, and related authentications.
For this, it will require an ad-hoc infrastructure, completely customized and linkable to all operations, ensuring not only on-chain traceability (verifiable on the blockchain) but also ensuring payments, transfers, guarantees. To achieve this, at TokenizArt, we have an Escrow Service system that facilitates different acts, such as keeping the ownership of the artwork locked until the physical delivery is completed.
It also facilitates the autonomy of the parties to stipulate milestones, clauses, payment methods, chosen currency or payment instrument (it is undeniable that physical art continues to use fiat currencies, and payment in cryptocurrencies is not common). All of this, Tokenizart takes into account, having conducted a meticulous study of the needs and practices in the art world.
It is also essential to link and secure that “Virtual Asset” to the physical artwork, a technological instrument that ties the digital identity to the underlying asset, along with elements that deter and discourage the chip’s extraction. At TokenizArt, we solve this with NFC technology and labels with VOID security holograms.
Additional tools to ensure the NFT’s function as a property title
At TokenizArt, we know that we are providing disruptive tools, even within the world of blockchain and the basic usability of NFTs.
We offer customizable solutions that facilitate the traceability and linking of physical artworks with Digital Assets created with unique IDs, improving and optimizing the life of artworks and the art world, linking it to the financial and fitting it into decentralized finance like “LEGO” pieces. Thus ensuring the interoperability of assets, platforms, and protocols.
Emphasizing the fundamental value that should guide projects seeking true innovation and longevity in the pursuit of disruptive forefront is “Composability.”
Composability is a system design principle that deals with the interrelationships of components. A highly composable system provides components that can be selected and assembled in various combinations to meet specific user requirements.
What is transferred when transferring an NFT?
First and foremost, for the sake of simplicity and as a preliminary statement, we will say that, in TokenizArt, during the ‘Transfer‘ process, the actual ownership of the underlying asset is transferred, linked to digital identity.
Of course, this entails more in-depth explanations from technological and legal perspectives, which we will break down and consolidate throughout the entire process that occurs within the Tokenizart platform, which is much more than a simple ‘minting on the blockchain.’
It implies a proper and comprehensive architecture from technical, legal, and financial standpoints before delving into the technological aspects.
The architecture must be integral to prevent the failure of token usability.
As a summary, it’s important to note that there is considerable confusion and speculative bubble surrounding NFTs regarding the determination of intrinsic value, often separated from the underlying asset, giving exclusive value to the works based on the virtuous act of ‘Tokenizing or minting on the blockchain.’
So, while tokenization undoubtedly improves the interaction of the work between buyers and sellers by digitizing the transferable title, we will continuously emphasize that the value does not lie in buying or acquiring the NFT (Token ID running on the blockchain) but in the underlying asset associated with the certification of identity and ownership being acquired.
In other words, the asset being transferred, used as collateral, certified, and valued already had an emotional and/or market value independently of whether it was included in the blockchain or not.
At Tokenizart, we are committed to showcasing the value of Blockchain, but also to highlight the essence of NFTs, which is the standardization to designate unique objects.
At Tokenizart, we do not promote speculative bubbles, nor do we encourage or generate value from ‘zero.’ Instead, we add value to assets that already had it. Not even in digital art does the value originate with its connection to an NFT; it reinforces and provides uniqueness and identity. The ‘magic‘ lies in the fact that this standardization makes the concept of digital scarcity possible.
What advantages does this bring?
It makes it possible to dissociate possession from ownership of an asset, providing numerous advantages to everyone involved in the art world. Among many benefits, we could mention that third-party delivery and custody are not required to guarantee loans or collateral since it can easily be done through an Escrow Service (see explanation in Tokenizart/FAQ/Escrow Service). Alternatively, an investor may be interested in acquiring a work for purely speculative purposes or as a store of value and choose to have custody or possession handled by museums, galleries.
The connection of art to the economic and financial world like Lego pieces was not possible analogically until the advent of these new disruptive technologies.
Thus, with these technologies, it is possible to create new service models with greater security and scalability for faster and lower-cost agreements. This provides more fluidity, speed, and above all, GREATER LIQUIDITY.
The digitization of real-world assets (RWA)
Our infrastructure facilitates:
Unlocking the full value of physical assets as digital tokens to make illiquid assets more accessible and attractive to buyers.
If you are an intermediary, appraiser, curator, or validator, our tools allow you to enhance your services by managing digital assets using blockchain, improving your processes, and ensuring a verifiable track record. You can verify the transactions made.
TOKENIZART creates customizable solutions for physical art that were excluded from leveraging blockchain infrastructure. Among them, we can highlight the use of escrow service for asset collateralization.
The Dapp (decentralized platform) operates on the Gnosis Chain, ensuring transparency, security, speed, and sustainability.
All transactions can be conducted without the need to understand concepts such as gas, fees, etc. As a user, you will not need funds to make transactions; all are subsidized by the platform.
Above all, it is important to highlight that Tokenizart ensures its adaptation to any legal framework and allows for the precise delineation of the rights involved in the works and those transmitted. Ensuring, as a guiding principle, the autonomy of the will of the parties and dynamic evidentiary burden.