Digital assets have seen somewhat of an explosion in the last few years and asset tokenisation has emerged as an opportunity.
Several use cases in finance exist (including in investments), mainly linked to the underlying blockchain technology and its potential to make market participation and assets more accessible.
Issues around regulatory frameworks and standardisation across different sectors and markets will need to be addressed to facilitate broad adoption though.
The technology enabling tokenisation might still be in its early stages, but there’s growing adoption and interest in the space. The COVID-19 pandemic acted as catalyst for interest and adoption of digital assets partly because large parts of the global population were in lockdown and had more time to research and experiment. Cryptocurrency was also viewed by some as a form of inflation hedge.
In this article, we explore some common questions about tokenisation and offer our views on this emerging technology.
Asset tokenisation is the process of representing physical assets or financial instruments on a blockchain or distributed ledger technology (DLT) using digital tokens. This technology has the potential to transform the way we invest, trade, and manage assets, creating a more efficient and transparent financial system.
Tokenised assets, whether real or digitally native, benefit from several blockchain characteristics, including an immutable, transparent record of ownership which can reduce the risk of fraud.
Tokenisation can also facilitate the fractionalisation of underlying assets. This allows for lower investment minimums and the potential to democratise ownership of asset classes. These include things like artwork, music and other intellectual property that have historically been limited to a very small part of the population.
Not only that, but tokens can have specific rules and characteristics, such as eligibility and transfer rights, encoded within them. These can be coupled with smart contracts (effectively computer programs native to the blockchain) to dramatically improve the efficiency of underlying operational processes.
All of this can facilitate financial inclusion by making it easier for people to participate in broader financial markets and systems. It can allow them to own and trade assets that were previously difficult or impossible to access due to geographic, regulatory, or financial barriers. Though, as we explore below, the road to broad-based adoption of asset tokenisation is likely to be a long one. There are likely to be significant obstacles to overcome along the way.
Recently, we’ve seen an increasing number of tokenisation projects. Among the most notable is a tokenised money market fund offered by Franklin Templeton, which has garnered close to $300M in AUM. Other examples include the tokenisation of fine art by the principality of Monaco, as well as several real estate and private equity examples.
Near- to medium-term opportunities for asset tokenisation will likely come from its most immediate benefits. For example, tokenised funds offer the potential for significantly shortened settlement times, on a common platform. This reduces the risk of fraud by providing an immutable ledger of ownership and transaction history.
Tokenisation can also increase liquidity by enabling fractional ownership, allowing investors to own a small percentage of a large asset (such as a building) rather than the entire thing. This potentially allows retail investors to invest in asset classes such as direct real estate that have historically been limited to large institutional investors.
Tokenisation can also provide broader access to assets outside of existing market trading. Tokenised money market funds, for example, offer 24/7 access to US Treasury assets outside of the traditional markets. In the medium term, we look for progress on central bank digital currencies (CBDCs) such as digital dollars and euros, which can act as the on- and off-ramps for tokenized products.
A variety of challenges must be addressed before asset tokenisation enters the mainstream. Firstly, there’s still a lack of regulatory clarity about the treatment of digital assets, which can make it difficult for issuers and investors to navigate the space.
Secondly, there are significant technical challenges, such as scalability and interoperability across platforms and market participants. These must be addressed to make sure that tokenisation can handle large volumes of transactions across different blockchain platforms.
There are also concerns about security and custody, as digital assets can be vulnerable to cyberattacks and theft.
Tokenisation has the potential to significantly disrupt the competitive landscape in asset management, enabling new entrants to differentiate themselves and capture market share from established players. Tokenisation allows for the creation of new types of investment products and can increase the accessibility of traditionally less liquid asset classes such as real estate. This in turn could attract new investors and increase competition for assets.
Additionally, blockchain’s high operational efficiency means that products can be offered with a fully digital distribution model at a lower overall cost with significantly shorter settlement times. If they can effectively navigate the evolving regulatory landscape, the providers of the component parts of this new ecosystem could steal a march on the sector as tokenisation enters the mainstream.
The landscape of asset tokenisation is rapidly evolving. It’s difficult to predict exactly what it will look like in five years. But there are several trends and developments that suggest where things are heading:
Asset tokenisation offers the promise of compelling benefits. But the current headwinds of regulatory obstacles, lack of standards and a fragmented and largely unconnected series of product offerings have resulted in relatively modest uptake by investors to date. And while there appears to be a broad consensus that tokenisation will play a crucial role in the evolution of the asset management industry, the timescale is still far from clear.
Asset tokenisation’s route to wholesale adoption will be largely dictated by external factors, like technology evolution, standards, regulation, and monetary policy. Finally (and importantly), investor demographics and attitudes to adoption will ultimately play their role too.
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Views and opinions are based on current market conditions and are subject to change.
This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.
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