Investors in busy streets

why Asia is waking up to tokenised securities

The world is sitting on $300trn of assets, just waiting to be split up into pieces, digitised and sold off to millions of new retail and institutional investors. Anything sold as a collective investment scheme with the promise of a future increase in value can be tokenised.

From art to classic cars, fine wine to office blocks and gold. That’s the theory behind security tokens, a form of cryptoasset which its backers say will revolutionise investing. But the greatest area of promise is in financial services.

Tokenised securities are any form of financial asset, like stocks and bonds, which are repackaged inside a digital wrapper and with transactions recorded on a blockchain.

The advantages of tokenisation for securities include faster settlement, automated compliance and 24/7 trading outside normal stock exchange trading hours.

Cryptocurrency exchanges have already opened the world up to the idea and practice of round-the-clock trading. Proponents say tokenised securities could do the same for traditional financial instruments.

taking opportunities

European regulators have so far taken the lead on codifying tokenisation into law.

Liechtenstein was the first major economy to formalise comprehensive regulation for the ownership, storage and issuance of security tokens in May 2019, followed six months later by a second law providing a clear legal basis for Security Token Offerings (STOs).

But there is a huge and as-yet untapped market for tokenisation in Asia, new research reveals.

A November 2019 report from the Asia Securities Industry and Financial Markets Association (ASIFMA) — which counts among its authors investment banks Citigroup, Standard Chartered, accountancy giant PricewaterhouseCoopers and Japanese broking giant Nomura — suggests tokenised securities could help tap into and develop deep, liquid capital markets in the Asia Pacific region.

Greater regulatory certainty is needed across participatory countries before the true value in tokenisation can be realised, ASIFMA says.

“Tokenising securities has the potential to increase efficiencies and drive down costs substantially,” the report says, adding that “the industry is still nascent and there are some uncertainties”.

Clarity is vital because “it may not be clear whether tokenised securities are a form of property [and owners need] the ability to assert proprietary claims when tokens are misappropriated, and the ability for the tokens to be the subject of a trust or a proprietary security interest,” ASIFMA notes.

what next for Asian tokenisation?

Despite European states aiming to take the lead on tokenisation, the fact is that their markets cannot compete with the depth and breadth of those in the likes of Hong Kong, Singapore, Japan or South Korea.

The global tokenisation market is expected to grow at a compound annual growth rate of 22.1% to over $2.6bn by 2023, with the Asia-Pacific region taking an ever larger slice of the action. A recent report by Marketsandmarkets.com suggests the major regions, including APAC, offer “several untapped and unexplored opportunities for the growth of the tokenisation market.”

Tokenization market by region

Source: MarketsandMarkets.com

There still remain significant elements of uncertainty across the APAC region. China — as ever — could offer the most to bolster tokenised securities in the region.

The People’s Bank of China officially banned STOs on 8 December 2018, adding to its ICO ban in September the previous year. Deputy Governor Pan Gongsheng told the South China Morning Post at the time that “illegal financing activities through STOs and ICOs are still rampant in the mainland” despite nationwide efforts by the central bank to clean up the cryptocurrency market. The PBoC move to issue a central bank digital currency, along with attempts to restrict private competition, mean it remains an unknown quantity.

As one of the largest cryptoasset markets South Korea too has faced political resistance to deregulation. Repeat cases of massive, wide-ranging frauds perpetrated on the public have not aided the sector’s cause. The recent 16-year jail term for the CEO of cryptoexchange CoinUp for an estimated $384m fraud is just one of many.

And yet the country’s ministry of science and technology is due to spend $380m on blockchain R&D, while National Assembly’s late-November move to recognise cryptoexchanges in law as financial institutions bear some hope that tokenisation may one day hit the legislative slate.

Certainly South Korea’s 2017 ban on ICOs may have been justified, but industry proponents hold out more hope for STOs and tokenisation.

Japan could be the biggest driver to grow Asia’s tokenised securities market in 2020 and beyond. The country already recognises cryptocurrencies as legal property under its Payment Services Act, and in 2019 legislators amended two linked laws: the Act on the Settlement of Funds and Financial Instruments and Exchange Act to include a definition of security tokens and duly regulate them.

STOs now fall under the remit of the two Acts as “interests in a collective investment scheme that are represented by tokens.”

Six securities brokers: Tokyo-based Monex — which also owns the Coincheck exchange — kabu.com, Daiwa Securities, Nomura, Rakuten and SBI have also formed a self-regulatory organisation authority to put in place stricter guidance for issuers and to bring some authority to the process. These kinds of moves are clearly the way forward for the Asia tokenisation market.