Blockchain technology could revolutionise the manner in which private assets are transacted, and invested into, particularly through the use of tokenisation, believe investment experts.
The possibilities of digitalising the value of private assets are gathering steam across the world. In Asia, Singapore, Hong Kong, Malaysia and Australia are leading the way for blockchain tokenisation experimentation.
Regulators are trying to keep up. In early November, the Monetary Authority of Singapore and Singapore Exchange (SGX) announced it had developed capabilities for other organisations to settle tokenised assets across different blockchain platforms. The central bank appears enthused by the possibilities. Sopnendu Mohanty, chief fintech officer for MAS, said in a statement at the time:
“Blockchain technology and asset tokenisation are fuelling a new wave of innovation globally… The concept of asset tokenisation, as well as other learnings gleaned from this project, can potentially be applied to a broad spectrum of the economy, creating a whole new world of opportunities.”
It’s worth bearing these comments in mind with Singapore’s ambitions to become a hub for private funds in Asia.
Hong Kong is also gearing up. In early October, stock exchange operator HKEX released a research paper titled ‘Financial Technology Applications and Related Regulatory Framework’ that outlined how blockchain could improve private equity markets.
“Blockchain’s biggest merit is its ability to provide a tamper-proof record and a permanent data chain to users. These characteristics precisely address market concerns in private equity investment,” the paper said.
Katrina Cokeng is chief executive of Xen, a Singapore-based wealth management platform using blockchain and tokenisation to access alternative investments via funds-of-funds.
She said a security token can capture much of the information needed for know-your-customer and anti-money laundering requirements, reduce paperwork and improve efficiencies in settlement and reconciliation.
Cokeng told AsianInvestor she believes blockchain and tokenisation could democratise the private markets the same way the development of stock exchanges changed the investing landscape, while encouraging greater capital formation.
Yet for all the possibilities, blockchain remains a niche technology. It’s almost brand new, and as such is essentially unconstrained by regulation – something that investors can interpret as a risk.
That’s limiting its growth, including in the private market.
WHAT’S THE CATCH?
“The challenge is not that it [DLT] is not a good idea, but rather, how do you work through the regulatory issues, and provide clarity, security and apparatus to support the model?” noted Aaron Perryman, EY’s Asia-Pacific leader for financial services advisory.
He noted that jurisdictions have differing levels of legal acceptance of digital assets. That makes interoperability of blockchain platforms and standardisation a problem.
Investors remain concerned with a wide variety of regulatory issues, including the need to enforce procedures for KYC and AML due diligence, evolving rules around crypto exchanges and even defining the crypto-asset market, according to a November released paper by Official Monetary and Financial Institutions Forum, an independent think-tank.
DLT also needs time to iron out all the kinks. While it is supposed to create immutable records, there are concerns that technical bugs could fail to protect the billions of dollars funnelled into the blockchain infrastructure.
As the Hong Kong Exchange’s paper noted, “...blockchain technology is still in a developing stage and would have technical defects.”
High-profile examples, such as bitcoins being stolen from trading platforms, have exposed the technical defects of blockchain. The HKEX paper said that blockchain also has smart contract programming vulnerabilities, and well as trading system and recording weaknesses.
Then there is the well-known scalability problem. Blockchain systems consume enormous amounts of energy, far more than traditional financial infrastructure. As the transaction volumes increase, the time taken to verify and process some of them will also lengthen. Some believe the new technology will of necessity have growing pains and as a result, it could take up to a decade or more to become mainstream.
However, advocates of DLT argue the technology has already evolved over the past few years.
“When Northern Trust deployed its blockchain solution for private equity we had to consider a more complex set of transactional requirements [relative to public markets] but with a lower volume and velocity of trades,” Chapman said.
Northern Trust’s efforts have been focused on using blockchain to improve efficiencies in the middle and back office, and Chapman believes these developments can potentially be replicated in other asset classes, such as real estate.
This article was adapted from a feature that first ran in AsianInvestor December 2018/January 2019 magazine.