With digital assets set to become ubiquitous, it makes sense for asset owners owners to familiarise themselves with so-called tokenisation technology. Industry specialists point to its liquidity, governance and customisation benefits, and institutions are likely to have to engage with the concept soon enough in any case, by design or otherwise, if they haven't already.
Cryptocurrencies continue their meteoric growth and governments continue to pour resources into blockchain and distributed ledger technologies (DLT) to develop their own fintech advancements such as online payments and digital currencies.
Tokenisation – the blockchain-enabled securitisation of an underlying asset class, which ranges from bonds and funds to real estate and even art and wine – is touted as a way to democratise private assets. There is no data available to show the rise in tokenisation demand, but those involved with the development of such digital assets say that interest has been picking up slowly but surely in Asia Pacific.
Family offices have expressed interest in tokenised assets, and a growing number of financial institutions have made inroads in the field.
Hong Kong family office Stan Group launched a tokenised property blockchain last year and in 2019 Unionbank in the Philippines launched a tokenised fiat currency to help with foreign remittance. British law firm DLA Piper tokenised an artwork by Chinese artist Wang Xiao Bo using the Toko platform it launched in November.
"The market is insufficiently mature to have hard data to support the rise in tokenisation," said Scott Thiel, technology partner at DLA Piper. "However... we have seen a steady increase in the number of enquiries and number of projects that are in the pipeline."
"Investors and asset owners are looking to leverage the benefits of blockchain technology and digital assets to not only create new products but also attract a different class of investors which they haven’t historically been connecting with," he told AsianInvestor.
A major selling point of tokenisation is that it allows for the breakdown of the asset into fractions, providing even retail investors access to the asset class. But larger institutions stand to gain too, for instance because of the liquidity and governance benefits of the technology, experts told AsianInvestor.
Tokens provide greater governance capability and data transparency and reduce friction when it comes to investment administration and life cycle operations, said Danielle Gerace, head of market advocacy and innovation for Asia Pacific at US asset management and servicing firm Northern Trust.
"Exiting alternative assets can be complicated when there isn’t an established or liquid secondary market," she told AsianInvestor. "You've got to pay specialised brokers to dispose of it – so if there's a market for these alternatives, supported through digitalisation and fractionalisation, then all of a sudden that creates greater price transparency and liquidity opportunities."
One example was a private equity blockchain solution that Northern Trust developed and launched supported by DLT that enabled a more efficient lifecycle management.
“You might create restrictions that say 'I don't want to invest in tobacco-related entities'," she said. "We create a smart contract on those exclusions so that when the private equity fund goes to make a capital call, they can automatically exclude any limited partner investors that have exclusions on a particular type of investment class."
REGULATION AND COMPLIANCE
Moreover, there is stronger regulatory certainty for tokenised assets than for, say, crypto assets, Gerace added, "so it's easier to find that pathway to market and life production capability".
A further point of note is that tokenisation doesn’t provide the anonymity of crypto. "You’re not substituting who the owner is with a string of letters and numbers – you’re just substituting a real asset for a fractionalised piece", said Douglas Wolfson, Hong Kong-based director of financial crime compliance at LexisNexis Risk Solutions.
A tokenised asset has comparable due diligence risks as its underlying asset class, he added. For instance, just as the compliance standards depend on the broker or estate agent in charge of, say, a real estate building, due diligence standards will depend on the broker for the tokenised version of the building.
Yet ultimately, while many of the practical issues of tokenisation have been addressed and many assets owners are curious, they remain cautious, as we will see in the second of this two-part series.