Tokenised securities: Too good to miss

TOKENISED securities have taken massive strides over the last couple of years, and Singapore has been a frontrunner in their development. Although the industry is still in its infancy, momentum among regulators, institutions and corporates has turned up a notch, bringing tokenised securities one step closer to reality.

Distributed Ledger Technology (DLT) is a key enabler to creating a digital representation, or 'token', of a given asset and has the potential to transform capital markets, from asset origination, securitisation, distribution to asset servicing. Some of the notable benefits include an increase in liquidity, better price discovery as well as a reduction in settlement times and their associated risks, including counterparty risk and clearing fund requirements.

DLT also has a role to play in supporting financial inclusion, by creating digital representations of assets - DLT enables 'fractionalisation' whereby each token could represent a small fraction of the underlying asset. The benefits to wider society would be significant, opening up a superior and vast asset universe at a lower buy-in cost. Smart contracts-enabled asset servicing would also bring down the costs associated with holding investments.

In short, costs can be brought down, markets can be opened up, and transparency can be enhanced. What's more, these implications would be felt across the entire value chain - from issuers to investors, and the multiple players in between, including banks.

The startup ecosystem is budding with new ideas and several large traditional institutions are entering into relationships to bring DLT to life. But there's still a way to go and several challenges to overcome.

For instance, we've currently got settlement cycles down from T5 to T3 - and even T2 in some instances - but this can be reduced further, and the shorter the timeframe becomes, the more cost savings will be had and the less the liquidity risks. Other challenges include improving interoperability between networks, custody and management of private keys, and enabling coexistence of traditional assets with the DLT assets.

So what needs to happen to get us there?

Financial institutions are an integral part of the ecosystem bringing scale, reach and many strands of expertise to the table. Together with regulators, they will chart a path forward for digital assets. Continued research and experimentation, primarily by the agile startup ecosystem, must be encouraged. Meanwhile, larger financial institutions that are in touch with the wider investor base must continue to support the momentum by connecting industry participants and reducing fragmentation in the ecosystem.

EXPLORING DIGITAL ASSETS

HSBC has been pioneering the exploration of digital assets to transform capital markets infrastructure, and we continue to support the development of new technologies which promote economic growth and financial stability. In Singapore, we have been working with Marketnode, a collaboration between SGX and Temasek, to explore the use of digital assets in renovating the bond issuance process. Separately, we have also launched Digital Vault, a custody blockchain platform to digitise the transaction records of private placements, allowing investors to access details of their private assets directly and in real time instead of having to request a search of paper-based records.

Regulators have an important role to play in supporting the development of digital assets by bringing more clarification to the market. In 2020, the Monetary Authority of Singapore supported the development of tokenised securities by providing guidelines for the tokenisation of assets, and later that year the Securities and Futures Commission granted its first licence to a virtual asset trading platform in Hong Kong. Switzerland followed by introducing a number of Swiss DLT law amendments in February 2021.

Such continued regulatory support is pivotal in bringing DLT-based products to reality. Given the global nature of such assets, regulators across countries must join hands to bring out more uniform standards, akin to how traditional assets are positioned.

There is still a long way to go, but the opportunities that can be derived from digital assets are too good to miss. We must now take the next step forward, collectively, to pursue their use in reality.

• The writer is head of securities services at HSBC Singapore.