Digitalization in financial markets heralds a new universe of products - but also expands the potential of existing products. Jürgen Stahl, External Strategic Advisor to SuisseTechPartners says tokenization creates new opportunities for asset subdivision and trading. However, he advises flexibility by market participants so they can take advantage of these innovations.
Tokenization - the next big thing for the asset management industry?
Digital assets, electronic securities, crypto-assets, tokenization, Security Token Offerings (STO) - every day you find numerous articles, notes and commentaries about these terms. Apparently, something is going on in the financial industry! Asset managers should be aware of these developments - some of them just might become very relevant to their business in one way or another. So, from the perspective of an interested layman, who has spent a considerable amount of his career working for a German asset management company, here are some thoughts, by no means exhaustive, of what might come out of these developments.
Many of the aforementioned developments rest on Distributed Ledger Technology (DLT) in one form or another. In an ideal DLT world, we would be left with pure peer-to-peer interaction, getting rid of all intermediaries (brokers, clearinghouses, custodians and the like). That is not going to happen in real life, at least not for the foreseeable future. But there are some other aspects of DLT that will help to streamline and simplify the processes. One key property of DLT solutions is that all participants in the DLT environment share the same set of data. This renders all kinds of reconciliation obsolete. Another idea that comes with DLT, is to use “smart contracts” that can help to automate all kinds of events once and for all in the DLT environment. Just two simple examples, but there are many more…
Tokenization - Part I
Tokenization of assets refers to assigning a digital value to a physical object or a financial asset. Thereby, once tokenized, the object can be exchanged on a DLT platform. The investment universe of asset classes that can be handled in the same way as securities can, potentially, be extended significantly. Imagine real estate assets or forms of enterprises like Ltd. / GmbH / Sàrl. Of course, this still requires that the corresponding regulatory frameworks be adapted to tokenized assets. Discussions with regulatory bodies have already begun. Once the regulation has adapted, this will extend possibilities for existing products as well as for the development of new product types.
“Tokenization of assets refers to assigning a digital value to a physical object or a financial asset”
Tokenization - Part II
There is another option that comes along with tokenizing assets: the correspondence between asset and token does not need to be one-to-one. For instance, more than one token can be assigned to a single asset entity. Effectively this means that via tokenization we can generate fractions of an asset. This feature should be particularly interesting to fund managers who offer mutual funds. After all, one of the main arguments (if not the main argument) for investing in mutual funds, is that a client can own a share in a diversified portfolio, even if they are only able to invest a small amount of money. However, if they can invest in fractions of securities via tokens, this argument goes away - the same effect can suddenly be produced using for example a plain old securities deposit. This can be both a threat to existing fund managers, as well as an opportunity to come up with new product types. After all, the need for those clients to get advice on where to invest will not go away.
Of course, there are more aspects around the theme of digital assets and tokenization; this is just meant to be a “teaser”. And as of today, it is not yet clear how far this development will go. But if we have learned anything from the digitalization journey thus far, then it’s probably good advice to start monitoring these things early on. It is perhaps even better advice to start preparing now to have the necessary flexibility, both in business models and infrastructure, to ensure you can react quickly if a development like this picks up speed.