Why have we not seen more tokenisation of assets?
By Jonny Fry
“If you build it, they will come”
Initially people thought that if only you could offer a digital share class on an existing asset, such as a property portfolio or indeed an individual property (and allowed this new digital share class to be traded on an exchange 24/7), investors would come flocking. However, similar to the quote from the Kevin Costner in ‘The Field of Dreams’things are not always as you think, as the quote was actually: “If you build it, he will come”. Indeed, to date there have been relatively few Security Token Offers (STOs) or, as some call them, the digital share classes of asset-backed securities.
For asset managers who have the responsibility to manage and look after others’ assets i.e. pension fund managers, banks and other asset managers, four services really need to be in place before they, themselves, are able to really embrace Digital Assets – banking, custody, exchanges and insurance. These services are now being addressed and, more importantly, governments and regulators are looking to introduce legislation to clarify how Digital Assets are to be treated. For example, the Swiss Stock Exchange is changing the lawso that multinational companies such as Novartis and Nestle will be able to have a digital version of their shares to be traded on its digital exchange, Six.
Interestingly, the Organisation for Economic Co-operation and Development (OCED) recently issued a presentation titled ‘The Tokenisation of Assets and Potential Implications for Financial Markets’. It posed a similar question to the heading above, in relation to the adoption of Digital Assets – “If it’s so good why has it not taken off already?” – and specifically identified:
- Custody services – to be able to link assets off-line eg equities, bonds, funds etc with online; its digital representation on-line.
- Digital currencies – the need for a trusted, potentially central bank-issued stable coin to allow initial payments to be made efficiently using a Blockchain and ongoing income from equity dividends, coupons from bonds, rent from real estate etc.
- Appreciation of the costs savings – institutions need to understand the tangible compliance and increased profits for their firms if they are to use Digital Assets. While reports from the likes of HSBC, which claims efficiency gains of up to 10xby issuing bonds using Blockchain technology, more studies and analysis of the real cost reductions are required.
- Niche use cases are likely to be earlier adaptors – such as the issue equity for private companies, for specialist Private Equity, Venture Capital, Infrastructure, Institutional Real Estate funds or the issuance of small to medium sized bonds. A vast amount of capital is locked away in private hands. A McKinsey reportfound that the value of assets held in private equity funds has jumped more than 700% since 2002; twice the growth in global, publicly traded equities. Tokenisation is one possible way to unlock this capital and offer exposure of the asset class to other investors.
- Prioritise the back office and removal of intermediaries – once the technology is being used to reduce risks and compliment compliance controls and a more robust understanding of the infrastructure that is required, there is likely to be greater demand to issue more Digital Assets.
There are a number of institutions exploring the challenges and opportunities that Digital Assets offer, and we are going to see more being issued in 2020. Fidelity (one of the world’s largest asset managers) claims, “We envision a future where all types of assets are issued natively on Blockchains or represented in a tokenized format”. While Fidelity is more vocal than most, many of the large law firms (certainly across Europe and in the City of London) are currently working on a range of Digital Assets proposals. There are publicly quoted companies which do not want to be the first to launch a Digital Asset, but they would like to be a very close second!! They believe ‘the direction of travel’ is tokenisation, but are just not sure when.
Christian Dreyer, CEO CFA Institute Switzerland“The big talk of town is securities tokenization, of course – or moving the aforementioned securities value chain on the (or a) blockchain. This is largely a matter of back-office logistics, but the operating model implications would be monumental”.
Could this mean we will look back on 2020 as being an inflection point for the wider adoption of Digital Assets, resulting in lower issuance costs, stronger compliance and better more relevant risk controls? After all, our lives are becoming ever more digitised, so why should the financial services sector be any different?