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Magazine Issues » October 2019

Digital, crypto and tokenised assets in securities services

CryptocurrenciesThe digital transformation of financial services is continuing apace. Digital technology, such as distributed ledger technology (DLT), is enabling any form of value to be transferred at low cost. This is not only opening the investment world to a wider client base, it’s also set to remove many of the complexities constraining the securities services industry.

Because of the speed of industry evolution, clear definitions of such new assets and solutions have yet to be cemented. The terms digital assets and crypto assets, for example, are often used interchangeably. As part of its definition, the European Central Bank (ECB) defines a crypto asset as one that “is not and does not represent a financial claim on, or a liability of, any identifiable entity”. That these assets lack an underlying fundamental value is the causation of both their novelty and inherent high volatility, according to the ECB.

Tokenisation – a growing phenomenon
The tokenisation of real-world assets into digital assets is a solution developed to address the risk profile of those assets. Tokenisation could also allow more efficient trading of all types of assets, including securities, bonds and private equities, on digital asset exchanges. Assets are converted to digital tokens that are backed by the assets themselves – and are particularly useful for releasing trapped liquidity in otherwise untradeable asset classes.

According to ISSA, the number of digital assets issued and traded now exceeds 1,800, with a total market capitalisation of more than US$260 billion. Crypto currencies account for more than 60% of the total transaction volume.

There are currently more than ten digital assets exchanges in the world, which are designed specifically for trading asset-backed tokens and encouraging token trading activities. In addition, there are more than 500 cryptocurrency exchanges – for which business models could easily be expanded to include asset-backed token trading.

Jurisdictions around the world are introducing regulatory frameworks for digital exchanges: these include larger jurisdictions such as Singapore, Thailand, Switzerland and Hong Kong, and smaller jurisdictions like Gibraltar. Despite the growing interest in tokenisation, nothing of scale has yet been achieved.

While there are considerable potential advantages in tokenisation, there are also challenges for securities services providers and their clients to overcome.

Foremost is a lack of standards and interoperability. The industry must reach a common view in terms of definitions of assets and how to make interoperability a reality. As industry participants introduce new concepts to the market, interoperability becomes even more important; without it, the additional liquidity that tokenisation offers will be limited to the size of the single exchange on which it is issued.

Several industry and regulatory working groups are looking to create standards around digital assets.

Institutional investors are reluctant to enter the digital asset market – given their fiduciary obligation, the risks currently associated with digital assets are untenable. Moreover, regulations require many institutional investors to appoint an independent custodian.

Experiment and adapt
While the impact of digital assets on post-trade will be significant, industry participants will have to change the way they think about products. Securities services providers need to be experimenting with these technologies,

Tokenisation and digital and crypto assets are as significant an evolution as the movement from paper-based securities to electronic form was in the past. We all have to adapt.

By Margaret Harwood-Jones, Global Head of Securities Services, Standard Chartered

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