Asset Tokenisation: The Next Frontier for Partnerships in Banking
The blockchain and crypto industries have been weathering the difficult ‘crypto winter’, with decreased activity and market value presenting barriers for companies when it comes to continuing operations. While the use of blockchain and distributed ledger technologies (DLT) is still in its early stages, the industry has been exploring various use cases and tapping into investment opportunities.
One trend that is attracting industry attention is the tokenisation of assets, enabling the creation of digital tokens on a blockchain that represents ownership of real-world assets. By unlocking the potential for fractional ownership of tangible and intangible assets, asset tokenisation is allowing investors to access a diversified range of asset choices for their portfolios.
According to a BCG report, the total size of illiquid asset tokenisation alone would be $16T globally by 2030. Considering the huge market potential, many banks and financial institutions are dipping their toes in the asset tokenisation domain in different ways, with engagement in strategic partnerships becoming ever so crucial for adopting promising tokenisation solutions. In this blog, we take a look at how the banking ecosystem is leveraging collaborative tokenisation capabilities to trigger more transparency, cost advantages, and enhanced liquidity.
To foray into this ambitious market, many banks have partnered with tokenisation service providers who issue digital tokens in place of the issuer’s assets. Digital tokens backed by underlying assets are controlled and executed using a smart contract. The conditions of the parties' agreement are put into lines of code already present on the blockchain network, making the smart contract a self-enforcing and self-executing contract.
This tokenisation process can be carried out either by partnering with technology providers or by using solutions of their own.
Partnering with Technology Providers
There are many cases where financial institutes partnered with companies that offer tokenisation solutions. Back in 2019, Banco Santander issued a tokenised $20M bond on the Ethereum blockchain with the help of a tokenisation solution provider Nivaura. It will live on the blockchain until maturity, with the investment and quarterly coupons tokenised as securities. Similarly, German banking conglomerate VR bank partners with Lition to develop a solution to process syndicated loans on Lition‘s proprietary blockchain infrastructure. The security tokens are to be issued using Tokeny‘s T-REX (Token for Regulated EXchanges) standard. Furthermore, Tokai Tokyo Financial Holdings and ADDX collaborated on security token issuances by Japanese real estate companies and banks. These future deals will be tokenised on the ADDX platform before being distributed by Tokai Tokyo to sophisticated investors in Japan. In addition, Japanese investors will be able to trade digital securities on the ADDX secondary exchange through Tokai Tokyo.
Building Own Solutions
One other way of tokenising assets is by developing one's own DLT solution. Digital assets bank Sygnum launched its own tokenisation solution back in 2020, which includes Desygnate, a primary market issuance platform, and SygnEx, a secondary market trading venue. Similarly, in 2022, HSBC announced plans to launch a DLT-based bond tokenisation platform called HSBC Orion that enables the tokenisation of both bonds and the currency used for settlement.
Assets Getting Tokenised - Real and Financial
There are different types of assets that get tokenised. As we covered in another article on Cointelegraph, these assets can be divided into two major categories: Real assets and Financial assets. Real assets can range from tangible assets such as artwork, real estate, etc., to intangible assets like intellectual property. For example, Artmundi partnered with Sygnum Bank to tokenise Picasso’s Fillette au béret painting, where the ownership rights were broadcasted on a blockchain enabling investors to purchase and trade shares in the artwork with Art Security Tokens (ASTs). Meanwhile, financial assets can be broken down into traditional assets like equity shares or digital assets like crypto tokens. For example, in 2019, Societe Generale Group’s subsidiary Societe Generale SFH issued EUR 100M of covered bonds (obligations de financement de l’habitat or OFH) as a security token, directly registered on the Ethereum blockchain. In the same way, Europe’s Bankhaus von der Heydt (BVDH) partnered with tokenising and asset custody provider Bitbond to issue Euro stablecoin (EURB) on the Stellar network, which can be leveraged by BVDH’s customers as well as third-party developers of financial applications to settle digital asset transfers on-chain.
Progress may not occur overnight, but increasing interest from players across all sectors indicates its high adoption in the near future. A token is going to be the basis of all things digital - be it simplest or complex - since the possibilities of transforming the management and transaction of real-world assets with tokenization indicate its potential for the future. But at the same time, it will also be important for regulations and legal frameworks to evolve in order to attain the reality of a truly tokenised economy.