The Business Times

Security tokens can shape future of wealth management in SE Asia

They allow superior access and liquidity through the concept of security token offerings backed by real assets.

Published Tue, Feb 12, 2019 · 09:50 PM

The last 12 months has seen the meteoric rise and fall of the quintessential crypto currency, Bitcoin, from its peak at close to US$20,000 in December 2017 to around US$3,600 today - a more than 80 per cent drop. At the same time, and certainly in (negative) correlation, there has been a rise in interest in security tokens (also known as digital securities).

What are security tokens and do you need to embrace or even understand blockchain or crypto currency to benefit from them?

In fact, blockchain and security tokenisation can shape the future of asset and wealth management by allowing superior access and liquidity through the concept of STOs (security token offerings) backed by real assets.

In South-east Asia particularly, we are seeing the rise of a new class of younger mass affluent investors who value customisation, flexibility and cost efficiency in asset and wealth management. This generation will continue to grow and is expected to reach 136 million in population by 2030. Furthermore, these investors are digitally savvy - 64 per cent of the mass affluent in Asean countries are under the age of 40, with almost a quarter of them below 25 years.

Interestingly, December 2018 marked the 10th anniversary of Bernie Madoff's arrest, which uncovered a deception of Ponzi scheme proportions lasting over 30 years and costing investors over US$65 billion. If blockchain had existed back then, the complex web of accounting fraud might have been prevented. By tokenising investments and putting all transaction information on the blockchain, all relevant records are visible to investors, regulators and auditors, thus promoting good behaviour on the fund manager's part. And because of blockchain's immutability, the fund manager would not be able to fake or change the data in the financial ecosystem.

Early this month, it was reported that Canadian crypto exchange QuadrigaCX effectively lost US$190 million of clients' holdings after its founder - the only person who knew the passwords to the cold storage - unexpectedly died in India. This would be highly unlikely to happen in the security token space, given that the underlying assets are registered instruments, not bearer instruments. A registered instrument is one in which the issuer keeps records of the security's owner, in the form of a registry, so when private keys are lost, ownership can be established at the registry. Crypto currency, like cash, are bearer instruments, with the holder of the private key owning the assets.

Security tokens are securities and fulfil the definition of such, according to the Howey Test. They are digital representations of ownership over an asset - which can be, for example, funds, equity, debt or physical assets. Just as paper-based certificates for equities or bonds can be issued to investors, tokenised securities can be issued using blockchain.

Most Initial Coin Offerings (ICOs) argue their tokens are utilities (that is, provide the user with access to a service or ecosystem) and not securities. However, "buyer beware" as more than 80 per cent of ICOs in 2017 were found to be fraudulent, with many used as get-rich-quick fund-raising schemes.

In contrast, security tokens must be compliant with existing securities regulations. Their value is derived from an underlying asset; hence they are subject to government laws controlling traditional securities. To issue security tokens, issuers need to do all the necessary paperwork, and only investors who have undergone proper KYC and AML compliance have a right to buy and trade them.


A smart contract is also an important component of security tokens. It is a computer program that can be deployed on blockchain; it "not only defines the rules and penalties around an agreement in the same way that a traditional contract does, but also automatically enforces those obligations".

Running smart contracts on blockchain yields two benefits: First, it gives complete transparency of rules and records. Second, the rules and records become immutable. Once the code is deployed on blockchain, no one, including the person who wrote it, can modify or delete it.

Traditional financial systems require various intermediaries such as registrars, custodians, brokers, market-makers and clearinghouses to monitor each other and prevent fraud. And since each stakeholder runs their own system and database, they need to validate the information coming from another party, often manually. Using smart contracts for one master set of rules and obligations among the stakeholders eliminates various reconciliation processes and inefficiencies.

We see four key benefits for investors here.

With the reduced settlement time, greater flexibility, and easier access to international investors, the liquidity of private securities is expected to improve dramatically.

In the alternative investments market, assets trade at a 20 to 30 per cent discount, typically because there is so much paperwork and intermediaries involved. With the implementation of security tokens and with sufficient participation, investors can freely trade assets with a much thinner liquidity discount.

In traditional financial exchanges, one can execute transactions quickly, but it takes at least two days until the transfer of ownership is settled. This is because it involves various reconciliation processes and service providers. By eliminating some (if not all) of these, blockchain can complete the settlement in real time.

The lower operational cost creates more flexible trading opportunities for investors. First, private assets can be tokenised and divided into smaller scale (that is, fractional ownership), and these security tokens become tradable among investors. A middle-class investor in Singapore may not be able to afford to buy into infrastructure projects or PE-backed bonds with high minimum denominations, but can certainly purchase 1/100th ownership in it through a security token.

Since all the rules become programmable and transparent to the regulator, it will be easier for investors to invest in private securities in other countries, particularly within Asean. For example, young investors in the Philippines are excited to access foreign investment opportunities. If a smart contract saying "Filipino investors need to meet criteria X, Y and Z to be able to invest into security #123 issued in Singapore" is deployed and audited by the regulator in advance, Filipino investors will be able to check their eligibility instantly based on the KYC and AML they have undergone beforehand. This will provide Asean-based investors easier access to each other's financial markets and products, and spells an expanded international investment opportunity set.


Security token exchanges are generally a more cost-efficient way to provide liquidity to investors. However, since almost all existing crypto currency exchanges are not licensed for security token trading, there is no way to ensure proper compliance.

Regulated security token trading platforms are a must for the asset-management industry and security token market to thrive. There will need to be greater education and understanding of the mechanisms behind security token trading platforms, and how investors can benefit.

There are dozens of such platforms globally awaiting licences, but very few have obtained one - mainly because most regulators struggle with whether to place these trading platforms under existing stock exchange rules or develop a new set of rules.

However, regulators are becoming more open to the concept. The firms that have received licences to operate security token trading globally include Binance (sandbox with Malta), my firm Xen (Mauritius regulatory sandbox licence) and Securrency (Abu Dhabi RegLab). Compliance with a regulatory framework is key to facilitating adoption of security tokens in the broader wealth management industry.

Security tokens can be a solution in providing liquidity and democratised access to over US$100 trillion of illiquid assets. This will shape the asset management industry in this region, considering that South-east Asia has young, digitally savvy and affluent investors who seek transparency and control.

Apart from the democratisation angle, tokenisation and blockchain can also open traditionally illiquid markets such as hedge funds, private equity funds, infrastructure and project bonds and venture funds to affluent investors, while offering regulators compliance and transparency at the same time.

Apart from proper licensing from the regulatory authorities, it is also important to look for projects with a good team, with experience in areas such as finance, compliance, security and technology.

The future of asset and wealth management in South-east Asia will be powered by blockchain and tokenisation for greater efficiency, transparency and liquidity.

Singapore stands right in the middle of this opportunity, especially given its aspirations to be a hub for financial innovation (facilitated by the rise of blockchain) and growth as an asset-management and infrastructure finance centre for this region.

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