Why have we not seen more tokenisation of assets?
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 law so 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:
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?
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