Why asset owners are cautious about tokenisation
Tokenised technology is spreading across Asia Pacific, but asset owners in the region are proving to be very cautious over embracing it. They will likely need more regulation, legal framework, familiarity and time before they get on board, say investment experts.
The changing of regulations surrounding tokenisation and cryptocurrencies across Asia Pacific markets is a double edged sword. While stronger regulations give investors peace of mind to dive into digital assets, it can also be costly for investors to adjust their strategies to fall in line with these regulations.
“Regulators have woken up and are pushing for new regimes with digital tax new rules on anti-trust data, and most radical, the breaking up of the tech giants. The regulation race in this segment has risen significantly... Clearly, asset owners and managers have to rethink their approach to all these risks," said Chia Song Hwee, deputy chief executive of Singaporean state investment fund Temasek, in his opening address at the Imas Digital Summit on Wednesday (March 10).
Douglas Wolfson, director of financial crime compliance at LexisNexis Risk Solutions, told AsianInvestor that generally, increased regulations are seen as a cost in the investment space but can be a net positive for the industry.
"Bringing it out of the darker corners of the internet allows larger sovereign wealth funds, pensions, insurers and general investment managers to invest in digital assets with less worry of asset provenance or regulator crackdowns," he said.
Some Asia Pacific markets such as Hong Kong and Singapore have sufficient regulatory frameworks for investments into tokenised assets, the pundits said. For instance, both markets have issued licences for security token offerings (STOs), which are tokenised initial public offerings (IPOs) and have drawn interest from family offices.
But institutional investors are still wary, particularly about issues such as legal documentation and the credibility of tokenisation promises.
“One of the things that we've encountered as we talked to some of the bigger institutions is 'what changes do I need to my fund documents, bond documents or trust deed?' It turns out that nine out of 10 times, there are [concerns about] some risk factors and some language around it," said Darius Liu, co-founder and chief operating officer at iStox.
“It’s an educational process. People are initially a bit scared of it and there's some level of confusion for the uninitiated,” said Liu, who was previously vice-president of total portfolio strategy at Singapore sovereign fund GIC.
“There is some regulatory certainty around these tokenised asset classes, but it does take time for issuers and exchanges to get licensed and regulated… It takes time to build the marketplace for these alternative assets," said Danielle Gerace, head of market advocacy and innovation for Asia Pacific at US asset management and servicing firm Northern Trust.
"You can create the exchange and license the exchange but you need to create participants in the exchange and build liquidity by bringing investors."
Because tokenisation is still relatively new, it looks likely that most asset owners will be willing to wait until the technology has demonstrated its capabilities over a sustained period before making a move into the space.
"There are some areas of nervousness from the asset owner community including whether the investors will, in fact, look to acquire assets in its digital form and whether or not the promise of secondary market liquidity will be realised," said Scott Thiel, technology partner at London-based law firm DLA Piper.
"We expect that the first few successful projects... will provide a great boost in this area of confidence," he added.
While most Asian asset owners look set to remain reluctant to invest investing directly into tokenised investments or cryptocurrencies, several have been willing to invest into platforms and technologies supporting digital assets.
For instance, GIC and Korea’s state-run National Pension Service (NPS) have reportedly invested in cryptocurrency exchange operators. And Temasek Holdings has been involved in various digital iniatives.
Temasek subsidiary Heliconia Capital Management was an early investor in Singapore-based digital securities platform iStox, which raised $50 million from asset owners such as the venture capital arm of Japan Investment Corporation and the government-owned Development Bank of Japan in January.
A Temasek spokesman declined to comment on Heliconia's investment but said that Temasek has been broadly deploying investments into digital solutions.
"We are excited about the opportunities presented by blockchain technologies in reforming existing market infrastructure and transforming processes and systems, such as through tokenisation of financial assets," he said.
"On this, we have been collaborating with Singapore Exchange and HSBC to explore these benefits, starting with the digitalisation of bonds," he added.
Last year, the three institutions [SGX, HSBC and Temasek] completed a pilot digital bond issuance for commodities trader Olam International.