The trend towards digitisation of financial assets and the opportunities of tokenisation on the global financial market has boosted Asia’s tokenised securities space. Yet a lack of inter-jurisdictional harmonisation and taxonomy, as well as traditional paper-based processes, is holding back the pace of change.
That’s according to a new paper by Asia Securities Industry & Financial Markets Association (ASIFMA), an independent, regional trade association of more than 140 member firms, including banks, asset managers, law firms and market infrastructure service providers.
After surveying digital asset exchanges, infrastructure providers, technology platforms, issuers, banks and regulators, the paper – published during ASIFMA’s Tech & Ops Week – provides updates on key developments in the tokenised securities space. It also addresses what market participants think about the state of the tokenised securities market and ecosystem.
Tokenised securities are referred to here as traditional, regulated securities, but with a digital wrapper – products like shares and bonds whose proof of ownership is recorded on distributed ledger technology (DLT).
Advantages of tokenised securities
The consensus among those consulted is that tokenised securities leveraging on new or emerging technologies, such as blockchain or DLT, has the potential to drastically reduce settlement time, settlement risks, plus administrative costs associated with know your customer and reconciliation functions. Alongside the implementation of automation of data and compliance management.
The ‘tokenisation’ of traditional financial instruments is also expected to deliver opportunities for efficiency improvements across the entire trade and post-trade value chain, contributing to more efficient risk management and pricing.
Development of tokenised securities
According to Laurence Van der Loo, executive director of technology and operations at ASIFMA, financial firms and issuers have been creating pools of expertise via practical experimentation which has led to a better understanding of the risks, costs and benefits of the key performance metrics. As well as a better understanding of the interaction between DLT networks and adjacent business process and infrastructure.
Van der Loo told The Fintech Times: “Most respondents flagged the need to solve for interoperability, but very few proof of concepts (PoCs) have been working towards that goal.”
For example, in May Deutsche Bank and Singapore fintech STACS completed ‘bond in a box’ proof-of-concept on the use of DLT for digital assets and sustainability-linked bonds. Set in the context of tokenised securities in the securities market, the pair collaborated on digital assets interoperability across platforms and related custody, digital securities and cash delivery-versus-payment practice, DLT to traditional systems connectivity, operating model evolution and smart contract templates including those involving sustainability-linked digital bonds.
Meanwhile, HSBC and Marketnode, the joint venture between the Singapore Exchange (SGX) and sovereign wealth fund Temasek, have completed a digital bond issuance in conjunction with a S$1billion perpetual securities issue by Singtel Group.
Regulations by regulators
Jurisdictions, such as Japan and Hong Kong have provided regulatory clarifications focusing on tokenised securities. Hong Kong has published a new licensing regime for digital asset service providers, while the Dubai International Financial Centre is consulting on a full-on framework for security tokens. China, however, has banned tokenised securities since 2017.
Interoperability is a major area of focus across a majority of participants to the paper, both in terms of interoperability between legacy and new systems as well as interoperability between different platforms and chains.
Proof of concepts in the industry are fragmented and siloed from each other. And, there is a consensus that there is a strong need for more wholesome industry participation at every stage of the security lifecycle.
ASIFMA’s Tokenised Securities Taskforce recommends that regulators and authorities continue to collaborate with the industry to supply coordinated guidance on the classification of tokens and continue to work to modernise archaic paper-based requirements which undermine the adoption of tokenised securities.
For example, there are certain processes for some asset classes where ‘physical copies of documents and wet ink signatures’ are still required by financial institutions or due to regulatory requirements.
Van der Loo comments: “Despite the many positive developments, to see tokenised securities reach ‘Main Street’ some remaining issues must be addressed. Several challenges remain in the regulatory space, including the lack of inter-jurisdictional harmonisation and taxonomy, as well as historical paper-based requirements and processes.”
ASIFMA recommends that regulators continue to explore regulatory sandboxes that allow for full value chain experimentation and broader ecosystem participation given the myriad of regulatory parameters, and also ‘collaboration sandboxes to underwrite cooperation between financial institutions to safely test interoperability and help scale participation, engagement, rate of investment and accelerate transformation’.
Respondents have called for regulators to run a test net with a ‘confined and clear framework for participants to build and test on, until they received approval from the regulator they had ‘graduated’ and could exit the sandbox’.
“The advantages and innovation tokenised securities can bring are enormous,” says Van der Loo. “The increased understanding of those advantages, regulatory involvement and growing number of PoCs are encouraging. Next on: solving for regulatory clarity and harmonisation, interoperability and full value chain experimentation to unlock all the value DLT can bring.”