From crypto winters to high profile bankruptcies and regulatory clampdowns, the past 12 months has seen crisis after crisis for the crypto industry. However, where the financial industry is concerned, there is still optimism on the growth of the digital assets as a whole.
Chainalysis, a blockchain data platform, characterised FTX’s fiasco as “a failure in governance, not a failure in crypto”, which highlighted the need for regulatory frameworks and the right governance structures. And another large crypto exchange, Binance, had its own issues with several US regulators last year, with founder Changpeng Zhao, known as CZ, stepping down as chief executive officer of the firm after pleading guilty to breaking US anti-money laundering rules. Some legal proceedings with the Securities and Exchange Commission are still ongoing.
“2023 was the year of regulation, where many of the guardrails were put in place. 2024 will be about implementing those frameworks and building on that and thinking about how the industry can develop further,” Chengyi Ong, head of Apac policy at blockchain data platform Chainalysis, told FinanceAsia in an interview.
Ong is watching the regulatory frameworks that policymakers are putting in place across Asia Pacific (Apac), how they will manage the risks in a way where innovation can still flourish and how they can build on those foundations to grow the digital assets sector.
Digital assets, according to the Monetary Authority of Singapore (MAS), refer to anything of value whose ownership is in a digital format. Tokenisation is the process through which the ownership rights of financial assets like cash and bonds are converted into a digital token. While the focus is often on cryptocurrencies, that is just one aspect of the complex ecosystem of digital assets.
Industry collaboration
Despite the high profile issues, there is plenty of activity in Asia.
"In Singapore, through various industry pilots with different financial institutions as part of Project Guardian, MAS has found that tokenised financial assets such as fixed income, foreign exchange and asset management products can be traded, distributed, and settled seamlessly across borders,” said Chee Hian Kwah, senior associate at Prolegis LLC, who advises financial institutions and fintech clients on legal, regulatory and compliance matters.
Chee added that while the focus so far has been on the technical development of tokenisation, he expects MAS to issue more guidance on tokenised assets and tokenised securities-related activities by financial institutions.
In May 2022, MAS launched Project Guardian to explore use cases of digital assets. At the Singapore Fintech Festival in November 2023, the regulator's managing director, Ravi Menon, highlighted how MAS is working with market players.
In foreign exchange, the Bank of New York Mellon and OCBC are working on a cross-border FX solution with the goal of establishing a 24/7 global liquidity pool. UBS, SBI Digital Asset Holdings and DBS Bank also executed a pilot repo agreement with natively issued digital bonds, working across Switzerland, Japan and Singapore.
Despite the optimism and interest, the reality is there are still many pieces of the puzzle that need to be in place for tokenisation to reach that tipping point.
Franklin Templeton is working on a pilot to tokenise funds through a Variable Capital Company (VCC) structure for efficient issuance and trading.
Elsewhere in Apac, the Australian government has proposed legislation on digital asset platforms. Further consultation is expected over the next 12 months before the draft legislation becomes law.
Over in South Korea, the government passed the Virtual Asset Users Protection Act in June 2023 as a first step to building a legal framework. While Hong Kong is looking at sandbox trials of stablecoins.
The increased regulatory clarity, according to HSBC’s managing director and global head of digital assets strategy John O’Neill, is instrumental to the liquidity in digital asset markets.
“There are three ingredients necessary to grow the digital asset markets. Firstly, reliable forms of digital money, but you also need regulatory and legal clarity. Often, legal innovation informs technological innovation. When both are aligned, you unlock the power of these markets,” said O’Neill from London.
Tipping point for tokenisation?
This momentum has led many, including Chainanalysis's Ong, to conclude that we’re potentially at an inflection point for tokenisation.
The financial industry is increasingly optimistic about the potential of tokenisation, with Citi forecasting that tokenisation will grow by a factor of 80 times in private markets and reach up to almost $4 trillion in value by 2030.
Despite the optimism and interest, the reality is there are still many pieces of the puzzle that need to be in place for tokenisation to reach that tipping point.
“We're very early in the digital assets tokenisation story, and if we take the total amount of activity across these products, it is very small compared to conventional formats. So, there will be a transition and that transition will not necessarily be rapid,” said O’Neill.
O’Neill believes it’s important for the bank and its clients to be part of that market in the early stage. In 2022, HSBC introduced Orion, a platform for issuing digital assets on the blockchain. It started with fixed income and in 2023, the bank launched tokenised physical gold.
Digital bonds, according to O’Neill, have faster settlement times and the ability to transform across capital markets with greater efficiency.
This year, HSBC plans to launch a digital asset custody service as it sees increased interest and demand in the sector.
“We are partnering with Metaco Harmonize, which caters to institutional-grade infrastructure to manage our custody service for digital assets. Our view is that this market infrastructure is an important component of the entire digital asset lifecycle,” said Zhu Kuang Lee, chief digital, data and innovation officer for securities services at HSBC in Singapore.
Market participants agree with the potential for tokenisation to unlock liquidity and make financial markets more efficient. However, Ong concluded that, because this is essentially about moving to a new form of financial market infrastructure, a clear and compelling use case is necessary to achieve scale.
