The role of tokenization in inheritance

Current pain points of transferring inherited assets

Usually, countries use the cadastral system to document the title and property rights in an electronic form. But, they still rely on heavy paper transactions. In the case of a typical land transfer, the parties perform the deal in the paper as a title deed, and then the land authorities acknowledge the paperwork and later file it in the electronic database. The documentation of records is secondary and happens only after the transactions have been carried out in paper form. Apart from this, people usually encounter family issues over equal division and titling of assets. Inheritance of assets provokes massive expenses for notary, property registrars, transfer costs, etc. which gradually slows down the entire process. And so, it calls for an efficient mechanism to transfer property rights with less time-consuming paperwork. Thus, some pain points can be listed as:

  • An equal division of assets among heirs. Not all assets are divisible and it can generate lots of problems in the transfer and distribution of inherited assets. (e.g a house- the only way to divide the inheritance in a fair way is to sell the house and distribute the money received from its sale).
  • Titling of assets: If the assets you inherit are commingled with those of your current spouse, your children from a previous marriage will suffer. When you inherit properties, you will want to hold them in your own name or put them in a separate property trust. Your new partner will own half of them if you combine them into a joint account.
  • Frictions: Transferring issues (notary, etc) some associated costs might be:
  1. Authorized copy of the decedent’s last will, signed in front of a notary.
  2. Heirs’ declaration notarial deed (when the decedent did not make a will).
  3. Deed of Notarial Inheritance Allocation (when it is not possible to make a private inventory).

What is Tokenization and how does it work?

Companies notably introduced technologies to ensure promising, secure and authorized transactions. For instance, card companies usually tokenize the card’s PAN by substituting it with a random string of numbers to prevent anyone from breaching the card details. Tokenization is often confused with encryption — where one can access huge sets of data when exposed to the encryption key, which is the opposite of tokens. Tokenization was first invented by Shift4 through their first tokenizing technology in the payments industry in 2005. So, tokenization is a process of replacing sensitive information with non-sensitive data (random numbers) in the form of tokens. The tokens are kept safely in the databases for organisational uses without bringing them into reach. The primary purpose of tokenization is to provide protection and security to sensitive information like CVV codes, medical health records, last will or testament, record and transfer of asset ownership etc. Combined with other technologies, it can provide a completely digital way of transferring any asset and digitizing the whole process of asset transfer. Since the tokens are a combination of random numbers, they do not have any value of their own.

Benefits of Tokenization

Tokenization is popularly used in the financial and banking sector to protect the classified information of firms, organizations, and customers. This payment data technology is a fraud-prevention mechanism to shield the data from cyber-attacks, data breaching, and payment frauds. Therefore, tokenization is a security technology — stores the randomly generated numbers in data servers called token vaults which is the replacement of original numbers. Following are a few advantages of tokens:

  • Tokenization creates a safe environment for frequent and recurring transactions by keeping them away from fraudulent activities.
  • Tokenization requires limited resources and therefore is compatible with the legacy systems.
  • It ensures external and internal protection for the businesses as the tokens are functionally unreadable by anyone except for the payment gateway.
  • Tokenization can be used in developing digital assets that can be owned, transferred, and stored without any need of a third party or an intermediary.
  • The tokens provide utmost security to the customers and business transactions which enhances the customer trust and confidence of the public with the technology.
  • It stimulates the development of technology-driven products and services like mobile wallets, cryptocurrency, and on-click payment.

How can tokenization solve some of the inheritance pain points?

In recent years, the importance of digitalized assets has been recognized for their value in life. While digital assets like software, social media, user accounts, downloaded content, gaming, etc. are considered valuable, some assets can be transformed as digital assets, which pose a remarkable counterpart to the conventional assets. Thus, dDigital assets represent the unit of value in the form of digital representations of real-world assets. What tokens have to do with this? Tokens indicate the part or share of a digital asset, and the process involving the digital conversion of real-world assets is referred to as Asset Tokenization. Except for the online end-to-end transactions and internet in-built internal structure, the traditional financial system is slow, less flexible, and liquid. Hence, tokenization of an asset creates a medium to facilitate businesses to conduct the secure, ascendable, and rapid transfer of assets across countries, blockchain-mandated companies, tokenized micro-economies, and decentralized transparent entities.

Future outlook and conclusion

There are nearly $256 trillion of real-world assets however, most of them are highly illiquid and still embodied in the paper form. Nevertheless, with the advent of blockchain, people can choose to possess/own from an artist-their art, financial assets, estate trusts, to illiquid assets. Similar to securitization, tokenizing assets allow fractional ownership through enhanced security, flexibility, cost reduction, and confidentiality. Tokenization of assets enables an easy and transparent transfer of inherited assets to the heirs. It not only solves the undesirable family issues over the distribution of assets but also cuts the middle man costs and enables fractionalizing the assets to ensure equal distribution. Now, you can imagine the transfer of an inherited asset as easy as pressing a click. This is what Blockchain technologies induced innovations will bring fruitful outcomes, and they form an integral part in revolutionizing the business world and asset management in the future.

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