After exploring the history and potential of new blockchain-based asset tokenisation technology to expand the frontiers of finance in part one of this series, NZ fintech expert, Binu Paul, details how some real-world pioneers have already boldly gone into the future…
As explained previously, asset tokenisation holds out the promise of creating a modern financial architecture in a fundamental redesign process set to bring cost savings, new revenue sources, broader access to investment opportunities and enhanced transparency.
While the tech might still seem alien or fantastical to many, regulators along with boards and management of financial services businesses should not underestimate the threats or opportunities the coming token evolution poses.
Of course, blockchain-based solutions won’t transform the financial sector overnight and, as discussed below, there remain many obstacles to overcome.
But leaders in the finance industry need to remain on top of asset tokenisation trends to understand the existential risks facing current business models and how to position their own organisations for future success as the inevitable change arrives.
Indeed, some businesses across the financial services universe are already adopting asset tokenisation to rationalise, innovate and grow: more will follow as successful use cases emerge with the, non-exhaustive, list below showcasing a few early-adopters.
At warp speed: banks, funds, commodities phase-in tokens
Funds management
Blockchain technology provides an immutable (tamper-proof) ledger of transactions, ensuring transparency and reducing the risk of fraud or error.
Smart contracts, self-executing contracts with the terms of the agreement directly written into code, automate various aspects of asset management, such as dividend distributions, voting rights, and compliance requirements.
And automation streamlines administrative processes, cutting out costs while minimising the need for intermediaries in a win-win that increases both efficiency and trust in the funds management system.
Moreover, asset tokenisation enables real-time settlement and 24/7 trading, removing the limitations imposed by traditional financial markets’ operating hours and settlement times.
Instantaneous settlement reduces counterparty risk and enhances market efficiency, leading to faster, more seamless transactions.
Asset tokenisation is also facilitating the creation of new investment products and strategies, customised to individual investor preferences and risk profiles. Tokenised investment products can be structured as exchange-traded funds (ETFs), allowing investors to trade them on secondary markets with ease.
Banking
Some of the largest global banks are leveraging blockchain-based asset tokenisation to enhance operational efficiency, slash settlement times and costs, improve transparency and offer innovative financial products.
JPMorgan Chase, for example, has developed the JPM Coin – a blockchain-built digital token representing fiat currency to facilitate instantaneous payments between institutional clients.
JPM Coin was designed to significantly speed-up transaction times for cross-border payments, in particular, removing costly layers and time-related risks associated with current international payments.
Elsewhere the Spanish banking giant, Santander, successfully completed an end-to-end bond issuance process in 2019 using tokenisation to represent bonds digitally on a blockchain.
Santander provided a proof-of-concept for tokenised bonds with the streamlined issuing process resulting in lower costs, easier management and greater transparency for investors.
Fellow European financial institution, the French behemoth Société Générale, likewise launched a US$100 million bond as a security token.
Nearby, the Netherlands-headquartered global financial services brand, ING, developed a blockchain-based platform for the tokenisation of trade finance assets. The ING platform aims to improve the efficiency and transparency of transactions, making it easier to manage and transfer ownership of trade finance assets.
Meanwhile another Spain-based financial giant, BBVA, tokenised a US$150 million syndicated loan using blockchain technology in a move that similarly led to more efficient and transparent processes.
European institutions aren’t the only financial players looking to tokenisation for meaningful operational gains with the Hong Kong-founded group, HSBC adapting blockchain tech for trade finance and letters of credit.
Commodities
Commodity trading is an enormous, constant global enterprise involving a multitude of cross-border complexities… and a perfect domain for improvement via asset tokenisation.
For instance, tokenised commodity assets have the potential to increase the liquidity in the notoriously opaque markets.
Traditional commodity trading involves significant barriers, including large minimum investments and complicated logistics: tokenisation lowers these barriers by allowing fractional ownership and enabling smaller investors to participate.
Blockchain technology has introduced increased transparency and security, reducing fraud and creating immutable (tamper-resistant) records. Higher levels of confidence typically attracts more participants which in turn benefits liquidity.
Venture capital and private equity
Unlike traditional VC and PE investments, which can be locked up for years, tokenised assets can be easily traded on secondary markets in what could create a virtuous chain of greater liquidity, quicker exit strategies, more participants and higher valuations for company founders and early investors.
Additionally, innovations such as ‘smart contracts’ can automate and enforce compliance with investment terms – again leading to lower administrative costs and other operational efficiencies.
Strange new worlds: why blockchain is still a voyage of discovery
The journey of new technology from exciting potential to real-world applications, however, is never smooth with many stops and starts along the way: blockchain is no different.
Now almost 17 years since blockchain first entered the tech lexicon, the digital innovation still faces a number of roadblocks including:
Regulatory and legal – different countries have adopted, or are approaching this sector with, multiple regulatory lenses resulting in a globally fragmented approach where similar applications are treated differently across jurisdictions. For example, most tokens fall within the definition of ‘securities’ in the US in contrast to many other countries. Such inconsistencies pose a significant challenge for innovators as well as consumers. Moreover, legal ambiguities also abound.
Technological – the key challenges with this maturing technology relate to scalability within each blockchain ecosystem (speed of transactions), lack of standardisation between different blockchains (limited inter-operability), tricky security protocols as well as complexities in integrating with traditional financial systems.
Market adoption – although a not-so-recent technology, it is a complex and fast-evolving one. The lack of widespread awareness among regulators, investors, issuers and consumers alike has, to date, seen a low level of adoption across the world.
Nonetheless, the uptake of tokenised asset solutions will inevitably rise as more successful use-cases become embedded in the financial system.
Mainstream adoption, though, will depend on both education and the arrival of easy-to-use applications that allow consumers to intuitively access trusted token-based financial solutions without worrying about how the underlying – possibly alien – technology works.
The next, and final, instalment of this series will lay out a plan of action for boards and senior management of financial services firms before stepping out into the unknown, tokenised world ahead of us.