Asset Tokenisation: a solution searching for a problem?
For many, the term ‘tokenisation’ doesn’t ring bells outside the broader scope of data security, but in the financial world, this solution will revolutionise how we see, invest in, and interact with assets forever. Tokenisation is poised to cause major disruption in numerous industries, specifically the financial industry, to the extent that businesses and organisations who neglect action now, risk watching their competitors ‘zoom past them’ later.
In October of 2019, Sygnum, the world's first digital asset bank, obtained a ‘Capital Markets Services Licence’ from the Monetary Authority of Singapore (MAS). This license enabled the company to conduct asset management activities in Singapore, focusing primarily on digital asset investment strategies for accredited and institutional investors. Founded by a leading team of Swiss and Singaporean professionals, the firm, which at the time was unlike any other before, aims to empower customers to invest in the digital asset economy with complete trust through their regulated and encrypted digital asset platform. In September 2020, having already built a strong presence in the Singapore market, Sygnum received the regulatory green light from the Swiss Financial Market Supervisory Authority (FINMA) to begin trading in digital ‘tokenised’ assets by launching its digital asset trading facility (OTF) platform.
Asset tokenisation as a whole, though still in its infancy, is forecast to absolutely revolutionise industries globally, growing to be worth a forecasted US$24 trillion by 2027 and completely reshaping the securitisation business model with its disruptive potential in the coming years. However, to date, tokenisation solutions have predominantly been unregulated, and often only provide partial solutions within the securitisation life-cycle. Sygnum’s regulated, end-to-end offering enables the significant benefits of asset tokenisation to be realised by issuers, investors, and institutional partners.
“Without regulated secondary trading venues with relevant liquidity, tokenisation will not take off. Much more collaboration between digital asset specialists such as Sygnum and established exchanges and banks, as well as M&A related service providers along the value chain, is needed. We are open to these partnerships to make Future Finance a reality,”
- Mathias Imbach, Sygnum Co-Founder
But what even is asset tokenisation? Tokenisation of assets involves the issuing of blockchain tokens that serve as digital representations of real-world tradable assets, such as a good, right or currency, and contains unique properties sufficient to attest and transfer token ownership. Security tokens are created through a type of Initial Coin Offering (ICO) typically referred to as Security Token Offering (STO), which can be used to produce a number of different token types such as equity, utility, or payment. Once created, security tokens can either be held, sold for cash, or traded on secondary markets for other tokens.
"While there are a lot of moving parts that need to come together, tokenising securities, financial instruments, and other assets could radically transform the traditional finance world, help in liberating trillions of dollars worth of non-liquid assets, and create all-new digital markets for a post Covid-19 world." said Floyd DCosta, Co-founder of Blockchain Worx and Block Armour in an exclusive statement to RegPac.
Sygnum’s tokenisation solution is built to improve the life-cycle management of securities issuance and investment, enabling issuers, such as SMEs, to reduce the cost and time spent on raising capital and managing corporate actions, whilst simultaneously granting investors a host of new liberties and opportunities. Since receiving approval from FINMA, Sygnum has begun working with issuers to tokenise their shares, raise capital in a fully digital manner as well as listing their securities on the digital asset trading facility to enable liquidity.
This digitisation, or 'tokenisation' of assets leading to the creation of a greater "token economy" holds massive potential in building a more efficient financial world by helping to alleviate the friction involved in the process of creating, buying and selling securities, and comes with a host of its own benefits for investors and sellers including:
Faster and cheaper transactions than traditional assets. As much of the transaction process is automated through blockchain 'smart contract' algorithms that trigger when a set of pre-defined parameters are satisfied, this significantly reduces the administrative burden involved in the buying and selling of assets, allowing transactions to be completed at notably faster & cheaper rates. For organisations, this is also an advantage as it means less high-skill human labour now has to be tied up in this laborious and often low-skill task and can be reallocated elsewhere, making the company more productive and profitable.
Transparency is another major advantage of this system - security tokens can have the token-holder’s rights and legal responsibilities directly embedded into the token along with the full history of token ownership. This is a significant advantage for investors as it allows them to have a more clear understanding of who they are dealing with, their rights as an investor, as well as a full list of who has previously owned this particular token and between what dates. Having a good degree of transparency is significant as it helps investors understand how much risk is involved when they are looking to buy a security. If an investor is unable to locate this information, they are significantly less likely to do invest.
Greater flexibility and liquidity to sellers and investors after illiquid assets have been tokenized. As tokens can be traded on secondary markets of the issuer's choice, this broader array of traders significantly increases the liquidity of the asset and benefits investors, who as a result of this enjoy more freedom of choice. This also benefits sellers as they benefit from the 'liquidity premium' and thereby capture a greater value from the underlying asset.
But perhaps one of the greatest advantages of a token economy would be significantly increased accessibility. Tokenisation could open up investment opportunities to wider audiences as reduced minimum investment amounts and periods would hypothetically increase the number of people now willing and able to invest in each opportunity. In addition to this, unlike many physical assets, tokens are mere digital representations, and are thus highly divisible, meaning that each investor can commit to owning only a very small percentage of the underlying asset if they so choose, thus helping to manage overall risk. As each investment can now be smaller, investors can broaden their investment opportunities, adding more diversification to their portfolios and trading in previously non-accessible securities in a tokenised form (such as equity, debt, and real estate, according to Sygunm).
Similarly to this, as electronic devices and high-speed networks have become practically ubiquitous, central banks are increasingly exploring the possibility of establishing sovereign digital currencies. Central bank Digital Currencies (CBDC), also known as Digital Fiat Currency or Digital Base Money, is the digital form of fiat money (a currency established as money by government regulation, monetary authority or law). CBDCs were directly inspired from Bitcoin but are different from virtual currency and cryptocurrency which lack legal tender status declared by the government and are not issued by the state. Presently, CBDCs are still in a hypothetical stage with some proof-of-concept programs, but once implemented the CBDC token system would function in the digital realm the same as hard currencies, being fully interchangeable with reserves and bank notes, be fixed in nominal terms, universally accessible, and valid as legal tender for all public and private transactions. Any alteration in the monetary base would be the result of a monetary policy decision. Of a sample of surveyed central banks, approximately 70% have said that they are, or will soon be engaged in CBDC work according to BIS.
With cash payments already declining dramatically over the last five years, and the introduction of CBDCs looming on the horizon, one has to wonder, are we witnessing the last days of physical currency? Perhaps not, experts have been predicting the demise of cash for over 60 years, but physical currencies have some advantages over digital ones given their untraceable, unhackable, anonymous and a surefire nature. Over two thirds of cash holdings in American dollars exist outside the country - aside from notable amounts held by foreign governments, this is because people stockpile cash for emergencies to give them a safety net to fall into should the worst come to the worst.
Presently, society does not have a suitable mentality to convert a purely digital currency, as it would go against the way our societal systems have been structured, what we’re used to, and what we’ve been used to doing as humans for thousands of years. Like the argument of removing the pilot from the cockpit of a plane - this could theoretically already happen with existing technology, in fact it may even make flying safer considering 80% of accidents are pilot error, but many people including myself are uncomfortable with entrusting machines and technology with this responsibility, even though we know deep down at the end of the day it is now much more reliable than humans in many fields. The psychology of having physical notes and coins over digital payment methods is intriguing, and appeals deep within human conscience, “there’s this sort of irrational feeling that if money is physical, it’s more yours, and you feel like you own it more” stated Psychologist Eric Uhlmann “If you touch a dollar more, then that particular dollar becomes yours”. Human history is plagued with some form of opposition to any form of change, whether for good or for bad and no matter how minor, it is simply evolutionary human nature to fear the unknown or defer from the rituals and routines we are used to - people opposed the credit cards upon its invention fearing it would kill cash and cheque payments. In the US, there was backlash against abolishing pennies – despite being worth less than they cost to produce, some Americans simply weren’t ready to part with the coin. Whilst it is very tempting indeed to forecast the demise of cash, for now at least it seems that prediction may be premature, and that cash will live on alongside new digital payment methods.
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