The energy business is one of the strategic industries globally. For the development of new, more environmentally friendly technologies, this area constantly needs an influx of new investments. Global investment in clean energy today is 301.7bn USD. It is worth considering that not everyone can invest in these industries since the entry threshold is very high. Therefore, the energy sector is forced to look for modern solutions. One of the most promising options is the tokenization of assets, which may provide new opportunities for investors and companies that need an influx of funds for further development.
Stobox is engaged in the tokenization of clients’ projects related to natural resources and will tell about tokenization options in the energy business in this article.
What Problems Does the Energy Business Face?
The energy business is very specific, and there are several nuances. First of all, making a profit in this sector takes time. It may take more than 10 years for some companies to reach a break-even point. The main reason is the need for significant investment in research and technology development and the slow introduction of new technological procedures.
The technology must become efficient, cost-effective, and scalable. Investing in the energy business is a problem for most funds because it is long-term. For example, green bonds have a maturity of 20 years. Because of such long terms, not all investors are ready to invest in energy technologies.
Another problem is the large amount of funds required for investment. In the energy business case, we are talking about investments much more than $1 million each. Investment funds must be 100 percent sure of the success of the project in order to invest in such volumes with a very long payback period. For this reason, the process of obtaining investments is delayed, as companies have to go through many checks and convince investors of the viability of their idea.
All this creates serious problems for the further development of energy companies, not to mention innovative start-ups that do not yet have a big name on the market.
What is Tokenization?
Asset tokenization is a set of processes that allow you to transfer all transactions with securities to the blockchain. A distributed ledger allows you to keep all records secure by providing access to all interested parties. Storing data on the blockchain is completely secure, and smart contracts ensure that transactions are automatically executed when certain conditions are met.
During tokenization, security tokens are issued, each of which is equal to a certain part of the tokenized asset. During a security token offering (STO), these tokens are offered to potential investors. This offering is similar to a traditional IPO but proceeds much faster, costs less, and as a result, the company does not go public.
Further trading of security tokens can be carried out through decentralized exchanges, thanks to which investors can increase their profits. They can also receive payouts similar to what happens in the traditional world of finance with stocks and bonds. Overall, tokenization is an innovative financing tool that is suitable for various industries, including the energy sector.
How Can Tokenization Help the Energy Business?
Asset tokenization has three key benefits. The first one is liquidity. Even if the project provides for long-term investments for 15-20 years, investors are not obliged to wait all this time. They can sell their tokens at any time and exit easily. On the other hand, they can hold tokens, receive payouts, and watch the tokens rise in value.
Secondly, if the tokens grow in price, the company’s valuation rises accordingly. Therefore, it will be easier for the company to raise funds in the second, third, and subsequent financing rounds.
Another important advantage is that the process of attracting investments becomes easier. An investor can buy such tokens from anywhere in the world. If earlier it was almost impossible to invest in the energy sector with just $10,000, now tokenization provides such an opportunity.
Asset tokenization solves many of the problems that exist in the energy sector. First of all, this is due to the opportunity to invest in long-term projects while gaining stable profits. Tokenized assets are easier to invest in, and the energy sector can raise more funds, especially from private investors, for whom this segment has been almost inaccessible recently. The entry threshold is lowered, which also makes investments more accessible.
Tokenization opens up great opportunities for companies that are looking for investments. This is especially true for innovative projects, which traditionally find it difficult to prove that their idea deserves attention from investors. The STO process is much simpler than a traditional IPO. In addition, there are several offering options that can be implemented for a specific project. To determine the most suitable type of crowdfunding, you need to consult with experts and decide on the jurisdiction in which you want to conduct an STO. Stobox can help you with all these questions, as it has many years of experience in conducting tokenization for its clients.