There are five basic steps to tokenizing an asset:
- Evaluation and confirmation of asset
- Smart contract generation
- Tokenomics
- Equity or cash flow
- Regulatory approval
1. Evaluation and confirmation of asset
If like in the case of precious metals, there’s already a market for the item, valuing the tokens is simple. If there’s no existing market, a valuation needs to be done by an accredited auditing or accounting firm. Wealth99 precious metal tokens are priced at the currency market value of the physical precious metal.
2. Smart contract generation
Once auditing is finalized the smart contract is created. The price and number of tokens generated correspond to the price and valuation of the asset. For Wealth99 tokenized precious metals, this part of the process is completed by the Wealth99 tech team.
3. Tokenomics
When generating the smart contract, the issuer must set the total supply of tokens and how many will be made available to investors. This can make or break a token created in a new asset class – especially if it’s in a speculative market. Too much supply can put off investors, as they may believe there won’t be enough demand to produce a high value.
4. Equity or cash flow?
The issuer must decide whether the tokenized asset’s purpose. Is it to provide equity, or is it to generate a profit-sharing or cash flow? For certain tokens – like Wealth99’s precious metal tokens, which represent outright ownership of the asset – the answer to this question is clearly 100% equity. While other assets might be suitable for either equity or cash flow or even a combination of the two. Let’s take the example of tokenizing a company:
Equity tokens
100,000 tokens are generated to represent a total of 50% ownership. As the company increases production or profits, or when it’s sold, the token holder gains value. This form of tokenization is similar to a traditional exchange-traded stock in a company, where you simply own a tokenized share.
Profit-sharing/cash flow tokens
Alternatively, the company owner could issue 100,000 tokens and peg their value to a percentage of profits generated by the business. Each token might represent 0.001% of the annual profits. The token holder receives value from the profits generated as opposed to the rise in the value of the asset itself.
5. Regulatory approval
The tokens must comply with the relevant securities and financial products regulations in the territories they will be offered in. This might include FCA approval, and KYC and AML compliance.