As the return opportunities becomes increasingly sparse owing to continued low interest rates, geopolitical instability and macro volatility, institutional investors are looking for ways to obtain new sources of alpha.
According to Alexandre Kech, CEO at Onchain Custodian, tokenisation’s impact will be felt initially in private markets (i.e. private equity, real estate) where the investment lifecycle continues to be inefficient, especially as transactions are often conducted bilaterally. These complex processes could be simplified and made more transparent if illiquid assets were tokenised with details recorded on a blockchain, and their behaviour administered via smart contracts. By digitalising illiquid instruments, they can be fractionalised more easily1, which could also help expand investor breadth and boost trading volumes, said Kech.
1 R3 (July 23, 2019) Asset fractionalisation: What, why and the future?
Ryan Cuthbertson, Head of Product Management, Securities Services at Standard Chartered, acknowledged that markets such as Switzerland were widely considered to be among the leaders in digital asset issuance and trading. And yet Asia Pacific stock exchanges and post-trade providers are also making progress, he added. For instance, the Stock Exchange of Thailand (SET) has confirmed it’s looking to build a digital assets platform which it intends to launch in 20202. In Singapore, government agencies are also embracing digital assets. In November 2018, the Monetary Authority of Singapore (MAS) granted a recognised market operator license (RMO) to 1exchange, a provider that supports the trading of digital tokens – and counts Singapore Exchange (SGX) as one of its investors3.
In Singapore, government agencies are also embracing digital assets. In November 2018, the Monetary Authority of Singapore (MAS) granted a recognised market operator license (RMO) to 1exchange, a provider that supports the trading of digital tokens – and counts Singapore Exchange (SGX) as one of its investors.
2 Coin Desk (May 14, 2019) Thai Stock Exchange building digital assets platform for 2020 launch 3 Coin Desk (September 6, 2019) The state of security token regulations in Asia
The lack of harmonised regulation interspersed with the absence of a comprehensive taxonomy articulating what digital assets are is an ongoing problem. Such issues could potentially block wider adoption of these instruments, conceded Cuthbertson. “Regulators have yet to come up with a robust definition of what digital assets actually are and this needs to be resolved. It’s also not known who will supervise these digital assets. We are still a long way from a definition,” he added.
However, progress is being made in the Asia Pacific region. Some regulators, including Singapore’s MAS and the Hong Kong Securities and Futures Commission (SFC) have produced guidance on digital assets – and Thailand has even introduced its own legislation. Meanwhile, the People’s Bank of China (PBOC) – despite adopting a fairly staunch position on crypto-activities amid legitimate concerns of fraud – is currently developing a digital currency.
Kech said regulators should take a proportionate approach towards supervising digital assets, and that proper oversight is integral to the institutionalisation of digital assets. He added, however, his unease that a handful of jurisdictions are introducing requirements that are going over and beyond their existing securities laws.
Some regulators, including Singapore’s MAS and the Hong Kong Securities and Futures Commission (SFC) have produced guidance on digital assets – and Thailand has even introduced its own legislation.
The industry accepts standardisation is pivotal to the success of digital assets, especially in areas such as asset safekeeping and settlement, and it’s an issue that International Securities Services Association (ISSA) has opined on. ISSA said it was essential for tokenised platforms to be able to co-exist and interoperate with the existing securities market ecosystem if digital asset issuance, capital raising, and investing is to flourish4. ISSA added that industry-wide collaboration would be instrumental in driving standards for digital assets, advising post-trade providers to leverage the ISO 20022 as a foundational starting point5.
“The absence of regulatory harmonisation is a problem now because it could potentially result in arbitrages across different markets in terms of their treatment of digital assets,” said Cuthbertson. “Industry standards are currently not the most pressing concern because digital assets are not operating at scale. Once these instruments acquire critical mass, standards will be key to enabling digital interoperability,” he added.
The industry accepts standardisation is pivotal to the success of digital assets, especially in areas such as asset safekeeping and settlement, and it’s an issue that International Securities Services Association (ISSA) has opined on.
4 ISSA (November 2019) Crypto-assets: Moving from theory to practice 5 ISSA (November 2019) Crypto-assets: Moving from theory to practice
As more investors begin to increasingly use digital assets for trading purposes, custodians will need to develop solutions to support their requirements, and this is something Standard Chartered is actively exploring. “We believe that – owing to our sizeable balance sheet strength and ability to meet liabilities should things go awry – providers such as ourselves are in a strong position to support clients with digital asset servicing,” said Cuthbertson.
In 2020, it’s likely that there will be greater collaboration between regulators and market participants in creating an ecosystem to facilitate tokenisation of financial assets – via digital tokens leveraging distributed ledger technology (DLT) or blockchain. Regulators will come up with best practices and standards on the issuance and use of global stablecoins, securities token, and central bank digital currencies.
In general, the securities laws of many countries were established prior to the advent or introduction of tokenisation, utilising blockchain or distributed ledger technology. Some jurisdictions – such as Switzerland, United States, United Kingdom, Germany, France, Netherlands, Singapore, Thailand and Hong Kong – have progressed further than others in analysing existing regulations and supplementing them to facilitate the legal framework for tokenisation. At a global level, the regulations with respect to tokenisation (which in this case, envisages the issuance or use of digital assets) require greater supervisory convergence to help realise full potential and address the following challenges:
