On 20 April Rosenblatt, Memery Crystal and the Realization Group held their blockchain breakfast briefing on asset tokenisation. Moderated by Laura Clatworthy (Partner, Rosenblatt), the panel comprised Helen Disney (Director, The Realization Group), Philipp Pieper (Co-Founder, Swarm), Breige Tinnelly (Head of Market Development, Archax), James Lasry, (Head of Regulatory and Funds Hassans, Gibraltar) and Daniel Tunkel (Head of Regulatory and Funds, Memery Crystal).
Key takeaways from the roundtable were:
- The world is moving in a digital direction with constant and continuing evolution. There is huge potential to revolutionise financial markets. Beyond investment, huge numbers of legacy processes and heavy administrative tasks could be digitised.
- While blockchain and digital assets are still nascent industries, there is ever increasing interest and demand from traditional financial market participants – another example of the ‘era of convergence’ of traditional and decentralised finance, particularly with respect to tokenisation of funds. (Fund managers are interested in the efficiency and scalability of tokens).
- Any kind of traditional financial and real-world asset can be tokenised: turned into digital assets managed on a blockchain which can also be fractionalised, if desired. Tokenised assets include equities, securities, bonds, precious metals, carbon credits and other commodities, works of art, real estate and other non-fungible tokens (NFTs).
- Boston Consulting Group values the token/NFT market as a multi-trillion-dollar industry; by 2030, tokenisation of illiquid assets globally could be a $16 trillion opportunity. Tokenised gold exceeded a billion dollars in value in March 2023.
- Tokenisation is not a new concept. When Bitcoin was launched, markets focused on how to deploy smart contracts and the perceived benefits of fractionalisation centred on liquidity – 24/7 market access, immediate settlement, fungibility/transferability of tokenised assets between owners/entities
- Both Archax (The first FCA Regulated Custodian, Broker Dealer and digital exchange and first Company on the UK crypto asset register and Swarm (regulated in Germany as a Financial Institution) described the process they had gone through in the those jurisdictions and discussed the positive progress with FCA and BaFin (respectively) as their chosen regulators.
- The primary German Stock Exchange (Deutsche Börse Group ) is a forward-leaning organisation; while licensed as an MTF and is using blockchain to improve parts of the securities value chain, it also has a dedicated entity for digital issuances, D7.
- MiCA compliance obligations, BaFin, other regulatory regimes, and hundreds of companies across Europe (alone) seeking registration and licences create the potential for significant regulatory ‘congestion’ until such time as it becomes an indelible part of the digital asset (and business) value proposition.
- The UK is in the middle of what is a complex and multi-faceted consultation process, likely to last into 2024 and to require parliamentary secondary legislation rather than merely calling for further rules from FCA etc. It is, sadly, still not possible to estimate when this process will conclude.
- That said, where tokens are in fact literal representations in digital terms of corporate shares and debt, their trading (and associated activities such as advice) is already regulated. This is perhaps not as widely appreciated a point as it should be.
- Archax explained that it had deliberately pursued a routine path to FCA regulation rather than approaching via the Sandbox regime.
- Swarm likewise found that it achieved much by approaching BaFin and holding sensible discussions about what it sought to achieve, although (as noted) in anticipation where the regulatory landscape was moving, it decided to register as a financial institution in order to satisfy BaFin as to its credentials and futureproof its business.
- Both of them were significantly involved in assisting the regulators to understand the core issues involved in a regulated market that accommodates crypto transactions.
- Gibraltar introduced DLT and crypto-specific regulations in 2018 and being a small jurisdiction constructive dialogue between the regulator and the professionals seeking regulation for their clients is possible
- Trust is key: regulated entities want to know who is holding the assets and how, what happens in a liquidation event, are rules enforceable across jurisdictions, are the risks clear and understood?
- There is broad institutional acceptance that digital assets and tokenisation have value in traditional banking and transaction processes. A number of major asset managers are looking at how these new technologies facilitate wider distribution of (and access to) funds and other efficiencies in issuance, liquidity and settlement.
- Whether built on blockchain technology or legacy systems, new ways of doing things must be communicated more effectively to target audiences; we have to really show regulators and industry participants exactly what are the key benefits and pain points that can be removed.
- If the concept of tokenisation is based on the mantra ‘build it and they will come’ then the roads leading to it need to be clear and accessible to those that are intended to travel along them.
- An issue of considerable importance remains liquidity. Entities seeking to raise money (and using the services of e.g. Archax or Swarm as a market for the tokens in question will need to have the services of persons who can provide or recruit providers of liquidity.
- The token market would arguably have taken off sooner and more profoundly than has been the case, had there been sufficient promise of liquidity four or five years or more ago. The sense is that 2023 may be the year in which this change in market activity and perception takes root.