Nasdaq Decodes: Tokenized Assets

Nasdaq Decodes with Ryan Wells explores the world of tokenized assets that leverage blockchain technology with Johan Toll, Head of Digital Assets at Nasdaq Market Technology. Below is a transcript of the conversation, which has been lightly edited for clarity.

RW: One of the topics that we are hearing more about these days is tokenized assets, which is in the world of blockchain and crypto currencies. Can you elaborate on the area? What exactly is a tokenized asset?

JT: Tokenized asset is where we issue different certificates, different securities, et cetera, using the blockchain technology. With this we can actually efficiently track the issuance process through smart contracts on the network, and we can manage the custody of the assets in a blockchain technology world. Borrowing a lot of techniques from the crypto industry -- we all know about bitcoin and Ethereum, we are now applying similar logic on to financial assets. And that is why we call them tokenized assets. It is digital assets issued on to a decentralized network. They are controlled through cryptographic keys, so you can feel much safer about the custody of the assets. 

RW: Can you give a metaphor — you mentioned cryptographic — but what exactly does that mean?

JT: An interesting example is the diamond industry, where we have large quantities of diamonds being traded. If you have diamonds that you own, you can tokenize the assets through a certificate that corresponds exactly to your diamond. Each diamond has specific characteristics that are logged into the certificate. By doing so, the issuer can prove that a specific certificate corresponds exactly to a specific diamond. When the certificate is issued on a distributed ledger, a wider audience can clearly see who the owner of the certificate is. If you want to sell your diamond, you can sell the certificate to someone else. That way, it is clear to the rest of the world that this diamond now has shifted the ownership to someone else. This is one example of how to tokenize diamonds into certificates that are managed securely in a blockchain environment. The special characteristic of tokenized assets and the use of blockchain is that the whole lifecycle of this diamond can be tracked, from its inception [through] its life.

RW: In terms of the benefits, how could this be applied to capital market infrastructure?

JT: We see many solutions of managing digital assets. So, going forward we need to investigate where it makes the most sense to apply the blockchain technology. In other words, in which scenarios and why should we start to tokenize assets. Right now, I believe it is primarily in the tracking process that we can actually build a complete solution covering the whole lifecycle of a digital asset through the blockchain environment. You can lock in certain parameters or characteristics of your instrument, of your security, into a smart contract. So already when the asset is issued, I can be guaranteed about certain characteristics or parameters to that asset — should it be a dividend to be paid out, should it be ownership restrictions, or should it be the life cycle of that asset.

RW: Looking forward, where do you see tokenized assets? Do you believe that this is going to play a bigger role in the world of market technology?

JT: We are heavily investigating this area now, and I can clearly see that the tokenization of assets is currently a much sought-after solution. We receive many requests: Can you support us in delivering a solution so we can manage our tokenized assets? I primarily see this taking off in new markets outside the traditional complex financial arena. I don't believe it is going to kick off with the complex securities we have today; it is more likely that the tokenization of assets take off in less-regulated or even non-regulated assets, primarily on the spot market. I think it will first evolve in new types of industries, maybe the logistics industry, or the insurance industry, loyalty points, or grain trading or commodities.

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