Digital assets and tokenisation: The future of financial services?

It’s been several years since digital assets were first declared the wave of the future: the antidote to the inefficiencies of global financial systems. But with news of cryptocurrencies tumbling in value emerging in the news–so much so that analysts are calling it a “crypto winter” – it’s no surprise that the market is feeling cautious, at best, about these assets. 

In truth, digital assets extend far beyond cryptocurrency and associated speculation. Digital assets represent a rich and varied ecosystem which, when explored, can unlock innovation in financial services. The potential for digital assets is so promising that Asia’s key financial centres, Singapore and Hong Kong, have announced regulatory frameworks to advance the progress being made in this space, and keep their status as the region’s fintech hubs. 

Let’s understand what digital assets are, their transformative use cases, and how you can tap into their potential as a business and technology leader.
 

Deciphering the digital asset landscape

In the simplest terms, digital assets are anything with value that is created and stored digitally. 

Digital assets, typically minted, stored, and exchanged on blockchains, represent secure, shared public ledgers where new information can be added without altering existing blocks. Blockchains are an example of distributed ledger technology (DLT), which allows several users to access, validate, and update records in a shared database all at the same time. 

Although the definition of digital assets is intentionally broad, in the context of financial services, these are the types you need to know: 

• Crypto assets: Digital currency stored on the blockchain, such as Ethereum and Bitcoin
• Stablecoins: Cryptocurrency designed for price stability and linked to commodities and fiat money 
• Non-fungible tokens (NFTs): A digital identifier representing ownership of a unique digital asset 
• Central bank digital currencies (CBDCs): A form of digital currency whose value is linked to a country's fiat currency and backed by its central bank 
• Security tokens: Digital assets that function like securities, such as stocks and bonds

Tokenisation enables ownership and confers value over digital assets. It is a data security process where sensitive information is replaced with data of a surrogate value, while the original data is stored in a secure location. 

You might have heard of tokenisation thanks to the recent popularity of NFT artworks, but this technology's applications in the world of finance are only just starting to be explored. 

Tokenisation: Revolutionising global finance

Ravi Menon, the managing director of the Monetary Authority of Singapore (MAS), has said that the "innovative combination of tokenisation and distributed ledgers offers transformative economic potential." In fact, S&P Global predicts that by 2030, tokenisation will "upend the transaction methods of many well-established asset classes, tangible or intangible" by improving accessibility, efficiency and transparency. 

This transformative potential was demonstrated by a proof-of-concept partnership between South Korea's Shinhan Bank and Standard Bank that leveraged stablecoins minted and issued by each bank to facilitate international remittances. Senders and recipients tracked the remittances through Hedera Consensus Service, which also confirmed the exchange rates at the time of transaction. Recipients could then exchange the stablecoins for local currency, 

This use case showed that tokenised digital assets removed much of the friction experienced by consumers in cross-border transactions, such as high intermediary fees (frequently shouldered by the customer), transaction times that took anywhere from three to seven days, and a lack of transparency during the transaction period. 

Another area that tokenisation could improve is securities. According to NASDAQ, tokenised stocks and bonds can improve liquidity and inclusivity, thereby increasing market participation and transparency, and in turn reducing risk. 

One example of this is the SG15M tokenised bond issued by DBS in 2021. Issued through the FIX marketplace, the fully automated fixed income execution platform allowed issuers to directly issue bonds to the marketplace and investors to participate at a fraction of the sum compared with traditional wholesale bonds. 

Tokenisation in wealth management, private banking and insurance

Tokenisation, which enables the conversion of asset ownership rights into a digital token on the blockchain, can be applied to a variety of assets: equities, bonds, real estate, and precious metals. Its increased transparency in payment and data flows, and improved liquidity and tradability, allows for interesting use cases for tokenisation in wealth management, private banking and insurance. 

Tokenisation allows for unlimited fractionalisation of assets, which means two things. First, it enables the expansion and acceptance of collateral beyond traditional assets. Second, it lets a broader, geographically diverse base participate in investment opportunities that were once out of reach, such as owning a fraction of a REIT portfolio, a rare exotic car, or valuable art. Asset tokens can also be used to trade precious metals, such as gold, in a more secure and cost-efficient way.

During a recent panel discussion that we moderated on digital assets and tokenisation in financial services, Johnny Wijaya, Managing Director and Head of BNY Mellon APAC Innovation Centre, commented, "There are certain types of assets today that may only be accessible to a select group of investors because of the size and cost of the assets. Fractionalising and tokenising these assets would make them more accessible to a broader investor audience."

One good example of this would be Project Guardian, a project between MAS, DBS Bank, JP Morgan and SBI Digital Asset Holdings that explores decentralised finance (DeFi) in wholesale funding markets. In its first industry pilot, Project Guardian successfully completed a cross-currency transaction involving tokenised JPY and SGD deposits.

Smart contracts can make transactions faster and more efficient. These are automated contracts stored on a blockchain that can be launched by predefined activity triggers to auto-complete transactions–turning settlement times into almost real-time transactions. This reduces counterparty risk and the possibility of trade breaks.  

Tokenisation can also transform insurance industries that experience monopolisation and delays in paying out claims. Decentralised Insurance Platforms on the blockchain would enable the automation of sales and underwriting, which would make policies more affordable. Smart contracts can also be used to rapidly pay out claims–for example, accident insurance claims could be automatically triggered by parameters such as rainfall amount or wind speed. 
 

The case for business adoption

Based on these use cases, we can identify several potential advantages for companies to adopt digital assets and tokenisation.

• Wider access to investment: Tokenisation holds the potential to open up participation in investment activities to more people, across borders via public distributed ledgers – subject to regulatory safeguards such as KYC and anti-money laundering laws. 
• More efficient data sharing and transactions: By cutting out the middleman and being essentially self-executing, smart contracts have intriguing potential use cases. These range from efficiently sharing data between institutions during clinical trials to potentially eliminating the need for auditing an end-to-end supply chain governed by a well-designed smart contract. 
• Improved record keeping and reconciliation: Distributed ledger technology ensures that previous records on the ledger cannot be altered. Thus, the digital ledger can function as the true source for diverse activities, from voting rights to profit-sharing. 
• Better risk management: Tokenisation increases transparency and trust in transactions and data flows, equipping all parties with the potential for better risk management.

Key challenges in the digital assets and tokenisation space

With compelling use cases, digital assets are vehicles with great transformative potential of great interest to companies looking to future-proof their industries. However, as this is an emerging space, both start-ups and established companies may face some challenges. 

The first is the lack of regulatory clarity. Given that the technology is still relatively new, coupled with the borderless nature of DLT, consistent regulation across the spectrum of digital assets is still absent. For adoption to become widespread, there needs to be a global taxonomy and a stronger legal, regulatory, and supervisory framework. 

These barriers to widespread adoption contribute to a second challenge: limits to the technology’s ability to scale and provide solutions for more users. Current approaches to digital assets are still fragmented and hampered by execution challenges, such as IP ownership. This means it will take some time for a network effect to drive large-scale tokenisation solutions. 

Third, there is a shortage of skilled talents proficient to operate in the digital asset space, particularly for start-ups and smaller companies. Job postings related to crypto and blockchain skills jumped 118% in 2021 but that there aren’t enough candidates to meet demand. This sentiment was also echoed by Rehan Ahmed, General Manager & Chief Product Officer at Marketnode during the panel discussion. "As a start-up, even if you're a corporate-backed venture, finding the right talent is extremely difficult. You have to find someone who has been at a financial institution for many years but they are just fed up enough to want to take the leap to you." Rehan commented when asked about the typical challenges faced by platform providers.  

Finally, there is still uncertainty on how to leverage digital asset technology beyond financial services. McKinsey blockchain research compiled 90 discrete use cases across several major industries, but ultimately concluded that it is still an immature technology that lacks a clear recipe for success, with the short-term value derived from lowering costs.   
 

Incorporating digital assets into your strategy

Despite these challenges, the transformative potential of digital assets and tokenisation cannot be denied. This moment presents a once-in-a-lifetime opportunity for ecosystem players, such as Big Tech, regulators, and thought leaders, to come together to foster innovation in this space and solve the complex problems hampering widespread adoption: consistent regulation, fragmentation, execution, and ownership.

Zühlke is an ideal partner in this journey. By working together, we can generate practical proof cases with the potential to scale into major solutions. A leading business and technology consulting partner, we are backed by over 50 years of interdisciplinary expertise to help you achieve radical digital business transformation.

Start with our insights on the future of banking or watch this webinar on the future of blockchain and distributed ledger technologies for financial services. To learn more about Zühlke’s capabilities in banking, financial services and insurance, contact us today.