Tokenisation is both challenging and eagerly awaited, much like parenting a teenager. Amidst regulatory uncertainty and potential gaps in understanding demand, the panel on “Tokenisation: the teenage years of development?” 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 Mill’s question on the progress of the regulatory environment any clearer for tokenisation and digital assets from a couple of years ago, Arnaud Misset described the European regulatory landscape as “fragmented”– not easy coping. MiCA (Markets in Crypto-Assets) – an EU regulation aimed at providing a comprehensive regulatory framework for crypto-assets and their service providers, covers tokenisation, defining rules for issuers and service providers while ensuring consumer protection and market integrity in the crypto-asset space. is a positive development.
“While MiCA is a positive development harmonising every digital asset rule, not sure the same rules will apply to all assets,” said Misset.
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. Now with the HM 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 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, still a bond – only a digital way of owning a conventional asset.”
Shedding light on web3, Laurence Smith commented that it is all about participation and empowering communities. “Web3 is global by definition -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 and focus on benefits of technology -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, 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. 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, bear in mind that the problem with market infrastructure is the way you manage/process/ operate things.”
Highlighting advantages such as accessibility, fractionalistaion and transparency, Smith spoke about the real time data token/blockchain provides. Additionally, it transcends global boundaries.
However, tokenisation still- doesn’t change the way to do fund administration, pointed out Misset – one still has to manage taxes part. “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. Doesn’t revolutionise the whole way despite benefits.”
In the web3 domain, Smith highlighted the rise of social media/ gaming application popularity – “Younger generation prefers– self custody and digital wallets to avoid brokerage, etc. The KYC challenge is relatively minor, making the barrier for entry low and more accessible, especially that it now is 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.
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 organization (DAO) that maintains top crypto indices on the market that allows users- that offers a platform to vote and share feedback on various parameters.
