Accessing opportunities through tokenisation
09 November 2022
Tokenisation can bring about more liquidity to previously illiquid asset classes, such as infrastructure, real estate or private equity, making them more accessible and attractive to various investor groups.
Putting these Real World Assets (RWAs) onto a distributed digital ledger as a digital token brings with it a realm of new possibilities, unlocking significantly more value and allowing them to be exchanged in real time. Given that cross-border finance processes are often complex, relatively inefficient and require significant expertise to complete effectively, real time international transactions are difficult to achieve using traditional systems. Enter distributed ledger technologies.
Before we go further however, what is meant by the digitalisation of an RWA? It’s a procedure where the rights to an asset are converted into a token on a distributed ledger, or blockchain. These rights are then traded on a platform, similar to a stock or bond. “Tokenisation can bring about more liquidity to previously illiquid asset classes, such as infrastructure, real estate or private equity, making them more accessible and attractive to various investor groups,” says Luc Falempin, CEO of Tokeny.
While tokenisation emerged from the desire to disrupt the traditional financial services ecosystem, it has brought a host of benefits to finance including increased efficiency, reduced costs and increased transparency. These benefits have had an impact across the value chain, for example increasing the speed of execution and the streamlining of transactions, the use of smart contracts in escrow arrangements and collateral management, the increased use of automation in the issuance, management and distribution of securities, as well as the possibility of fractional ownership.
The tokenisation of assets, and the fractional ownership benefit that stems from this, is opening up markets that were previously locked to certain investors. Access to certain asset classes, such as private equity, infrastructure, real estate, and even in certain cases digital assets like intellectual property, is becoming increasingly easier as fractional shares bring down the cost barrier.
Not only would this bring increased liquidity to these markets, but would also mean capital markets become more inclusive, as well as enabling global capital pools to reach a part of the market that was previously restricted.
Notably, tokenisation could also enhance small-to-medium enterprises access to financing options by allowing for access to a larger investor pool. Retail investors could, theoretically, directly or indirectly fund these businesses and projects, meaning that the flow of capital within the economy could be more efficient. However, this comes with a caveat as Tobias Seidl, Co-CEO of Stokr noted. “Tokenisation will not help if you do not have something interesting to sell as an investment. While it might ease access, SMEs need a community of clients who would still be willing to invest.” Falempin echoed this, highlighting that “businesses might IPO in order to gain access to the public exchange, but this also comes with the infrastructure, a certain level of compliance and an audience of users. The distributed ledger can act as the infrastructure, compliance is built into the token and it travels with the token if it is exchanged, however you don’t get the audience.”
Tokenisation therefore has the possibility to bring a number of benefits to global capital markets, increasing liquidity in secondary markets, and bringing more inclusivity. Nonetheless, challenges must still be overcome.
Distribution – the chicken and egg problem
Both Seidl and Falempin emphasise the fact that technically, tokenisation has progressed leaps and bounds and is no longer a significant challenge. From a regulatory perspective, things are fairly advanced as well, with the upcoming Markets in Crypto Assets set to further clarify certain aspects.
“The next real challenge we must overcome is distribution,” says Falempin “For long time, it was a real chicken and egg problem. To create a virtuous cycle in the marketplace we needed attractive tokenized assets. Indeed, the more we get appealing assets in a tokenized form, the more our customers get the interest of investors, and the more we get new issuers willing to tokenize assets.”
It’s critical we onboard institutional solutions such as custodial wallets and the like as quickly as possible.
Getting the user experience right is also key to Seidl, as it is undoubtedly more confusing for many than using a simple brokerage account. “Not everyone wants to hold their own private wallet,” notes Seidl. “It’s critical we onboard institutional solutions such as custodial wallets and the like as quickly as possible. Building these innovative layers in the market will help in showing that tokenisation has no actual impact on the underlying asset, and that there is less risk and less intermediaries for the investor,” he continues.
Finance is similar to a cruise ship in this sense. It might take some time to pivot but it has been set on this course, it might just take a bit more time to make the turn than many would like.