WITH all that happened in 2022, it’s almost hard to believe that this time last March, investors were bullish on buzzy cryptocurrency and non-fungible token markets.
But the current quiet in the digital asset realm does not spell the end of an era. Amid expectations of recovery and beliefs that Web 3.0 remains the next big development, investors are still eager to explore opportunities – albeit safer ones – in the digital market.
In response, traditional finance players are moving in to capitalise on demand. A fresh wave of tokenisation – whether representing real assets on distributed ledgers, or traditional asset classes in tokenised form – could bring new asset classes to a muted market.
“Not your keys, not your coins”
Perhaps no phrase sums up the learnings of 2022 better than this popular mantra on digital asset ownership, which some credit to Bitcoin entrepreneur Andreas Antonopoulos.
Prior to last year, we have seen how investors knowingly (or unknowingly) leave their digital assets on centralised exchanges without additional safeguards in place. But cases of centralised exchanges going insolvent have illustrated the risks involved in laying claim to these assets.
In response, more are turning to traditional financial institutions such as banks and trusted third-party firms to safekeep their holdings. Northern Trust, for example, in 2020 jointly invested with SC Ventures in Zodia Custody, an institutional grade and UK’s Financial Conduct Authority regulated crypto asset custodian.
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Governments, too, are moving to support a shift to stronger asset protections. Japan’s Financial Services Agency requires domestic exchanges to keep 95 per cent of customers’ assets in offline environments.
And last month, the Australian Treasury announced it will establish standards to ensure service providers adequately safekeep clients’ crypto assets, while the US Securities and Exchange Commission proposed to require investment advisors to store clients’ cryptocurrency assets with qualified custodians.
Indeed, not all custody services are made equal. The level of security and risk exposure will be key differentiating factors when investors decide where to park their assets. If 2022 taught us anything, it will be that investors will seek assurance that their digital assets are held to the highest standards and not commingled or used for other forms of investment activities.
1/1000th of a building
Beyond redefining concepts of digital asset ownership, the events of last year are also could see the market move towards tokenisation of traditional assets, such as real estate, bonds and carbon credits.
Investors, favouring less volatile wagers, are sniffing out new nooks in the digital asset space that can deliver alpha – and tokenisation of traditional assets is relatively unexplored territory.
The move also makes sense amid monetary tightening measures as recession brews: ownership of a piece of real estate, for example, can be fractionated into 1,000 tokens, each priced more digestibly and offering a shorter return timeframe than as a traditional whole.
This increased liquidity might even spur more investing activity, resulting in a healthier market.
But what of regulation? Governments across Asia-Pacific have been reticent about classifying digital assets and defining their legal frameworks. But major upsets are now spurring government agencies to sharpen regulatory clarity in order to punish bad actors and take a more involved stance in the development of the industry.
For one, Australia’s treasury recently published a consultation paper classifying digital assets into key categories to guide its regulatory approach, while South Korea’s Financial Services Commission published guidelines on the types of security tokens that can be regulated under capital markets rules.
Meanwhile, the Monetary Authority of Singapore is clarifying the tax treatment of digital assets and looking to support tokenisation of financial and real economy assets, while the Hong Kong Monetary Authority in February issued the world’s first government-tokenised green bonds.
Traditional finance players such as banks are pursuing tokenisation experiments on these positive signals. Many may build digital asset-handling capabilities, such as the ability to tokenise traditional assets, which are fully integrated into existing systems, enabling traditional markets to co-exist alongside digital ones.
These efforts can range from as complex as tech stack development, to as simple as reconciling the number of decimal places between fiat currencies (two) and cryptocurrencies (eight) to enable exchange. With digital assets among the most profitable holdings if held on bank balance sheets, a slew of project launches can be expected this year.
We may be in the early days of tokenising traditional assets. But the dual drivers of greater regulatory clarity and new technologies developed by traditional players will see a significant uptick in tokenisation activity, paving the way for widespread adoption of and openness towards tokenising previously illiquid assets.
By pushing the boundaries of what an asset means to investors, and what can be kept by custodians, we might just unlock digital assets’ real potential.
Disclaimer: The content of the article is provided as general information only and not intended to be construed as investment advice.
The writer is head of digital assets innovation, Asia-Pacific, at Northern Trust
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