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Tokenization of Assets and Government Bonds

Why is it in the news?

  • The Reserve Bank of India (RBI) intends to investigate the tokenization of assets and government bonds within its wholesale Central Bank Digital Currency (CBDC) pilot project.
About Tokenization

·       Tokenization of assets involves converting ownership rights of physical or digital assets into digital tokens, which are then recorded and stored on a blockchain.

·       These digital tokens serve as representations of ownership, providing a secure and transparent method for transferring and trading assets.


Mechanism of Tokenized Assets

·       Token Type: The process begins by defining the type of token to be created, which can be either fungible or non-fungible. Fungible tokens are interchangeable (e.g., cryptocurrencies like Bitcoin or Ethereum), while non-fungible tokens are unique and cannot be exchanged on a one-to-one basis (e.g., digital collectibles).

·       Blockchain Selection: The next step involves selecting a suitable blockchain platform to issue and manage the tokens. Popular blockchain networks for tokenization include Ethereum, which supports smart contracts and custom token creation.

·       Third-Party Verification: To ensure the legitimacy and integrity of the tokenized assets, a third-party auditor may be engaged to verify the ownership and authenticity of the underlying assets before issuing the tokens on the blockchain.


Significance of Tokenized Assets

·       Liquidity: Tokenization enables assets to be divided into smaller, tradable units, increasing liquidity and market participation. Fractional ownership allows investors to purchase smaller portions of high-value assets, such as real estate or artwork, which were previously inaccessible.

·       Accessibility: By lowering the barriers to entry, tokenization democratizes investment opportunities, allowing a wider range of investors, including retail investors, to access previously illiquid or exclusive assets. This can foster financial inclusion and promote broader wealth distribution.

·       Transparency: Blockchain technology provides a transparent and immutable record of asset ownership and transactions. Each token transfer is recorded on the blockchain, creating a tamper-proof audit trail. This transparency enhances trust and accountability in financial transactions, reducing the risk of fraud and manipulation.

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