Tokenisation is both challenging and eagerly awaited, much like parenting a teenager. Amidst regulatory uncertainty and potential gaps in understanding demand, the first FundsTech panel on “Tokenisation: the teenage years of development?” held in London today examined whether tokenisation is a solution in search of a problem. If not, where should fund firms and providers set their sights next?
The panel was attended by Arnaud Misset, chief digital officer, Caceis; Dr Ian Hunt, author and designer of FundAdminChain’s funds ledger, FundAdminChain; Laurence Smith, senior market strategist, ConsenSys and moderated by Chris Mills, managing director, Citisoft.
In response to Mills’ question on the progress of the regulatory environment for tokenisation and digital assets in the last couple of years, Arnaud Misset described the European regulatory landscape as “fragmented”.
Acknowledging MiCA (Markets in Crypto-Assets) – an EU regulation aimed at providing a comprehensive regulatory framework for crypto-assets and their service providers that covers tokenisation, defining rules for issuers and service providers while ensuring consumer protection and market integrity in the crypto-asset space, as “a positive development”, he added: “While MiCA is a positive development harmonising every digital asset rule, not sure the same rules will apply to all assets.”
Providing a UK perspective, Dr Ian Hunt opined that there is little going on in funds tokenisation. “There is some activity in money market funds, but not much. With the Treasury Taskforce in action, we know what to do without breaching rules, but the definitions are limited. The focus has been on the tokenisation of conventional assets, not the cash side. The use cases are limited, but it has surely opened the door for legislative clarity,” said Hunt.
The ecosystem of a single operating model across all asset classes is the need of the hour, he added. “If you tokenise a bond, it is still a bond. The difference is only in a digital way of owning a conventional asset.”
Shedding light on web3, a new iteration of the World Wide Web which incorporates concepts such as decentralisation, blockchain technologies and token-based economics, Laurence Smith emphasised that it is all about participation and empowering communities. Highlighting advantages such as accessibility, fractionalistaion and transparency that come with real time data token/blockchain provides, he underscored: “Web3 transcends global boundaries and hence, is more accepting.”
As per Misset, the key to building trust is helping clients understand why they need to get through “pain points” in the first place. “We need the cash leg and secondary market. Besides, there should be a focus on the benefits of technology and how it can be used for collateral management.”
Commenting on the business case for tokenisation and the demands fuelled by it, Hunt highlighted the standard benefits of blockchain – immutable history of the transaction, and distributed ledger technology (DLT) enabling data sharing between participants in real time securely.
“In the funds’ world, there are benefits of having self-maintaining registers and owning funds tokens in the wallet. With regulators’ approvals in place, one doesn’t need a TA to maintain a ledger as long as the regulator allows. Additionally, tokenising cash eliminates settlement risk to offer simplified cash management.”
However, tokenisation still doesn’t change the way to do fund administration, pointed out Misset – one still has to manage taxes. “We have to take the big picture with tokenisation. At the start, many thought there would no longer exist the need for middlemen or a custodian – then FTX happened. Despite its benefits, tokenisation doesn’t revolutionise the entire ecosystem.”
In the web3 domain, Smith highlighted the growing popularity of social media/ gaming application popularity. “The younger demographic shows a preference for self custody systems, digital wallets and other such ways to avoid brokerage, etc. The KYC challenge is relatively minor, making the barrier for entry low and more accessible in what is now a $3 tn dollar market.”
In conclusion, Misset opined that trial and error is the way to improvement. According to Hunt, “Digital cash we can trust is a must. The finance sector still doesn’t trust crypto as a settlement currency. Atomic settlement is the way forward in the short term, whereas the demand for the longer term is to create a purely digital environment that is self-executed by getting rid of intermediaries such as in the UK equity ISA.”
Smith, who considers governance and capital formation two crucial factors driving the success of tokenisation, also cited the example of Index Cooperative – a decentralised autonomous organisation maintaining top crypto indices on the market that allows users a platform to vote and share feedback on various parameters.
