1. Home
  2. Blog
  3. UPSC

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.

Get free UPSC Updates straight to your inbox!

Discover more from AMIGOS IAS

Subscribe now to keep reading and get access to the full archive.

Continue reading