Tokenised securities: time to turn experimentation into real drive forward
24 June 2021 Asia
Image: stock.adobe.com/anekoho
The Asia Securities Industry and Financial Markets Association (ASIFMA) has highlighted challenges that must be addressed before tokenised securities become traded more widely on ‘Main Street’.
This includes a lack of regulatory harmonisation across jurisdictions, along with the persistence of paper-based processing and documentation requirements.
ASIFMA’s Tokenised Securities Taskforce advises that financial authorities should continue to liaise with industry firms to provide coordinated guidance on how tokens should be classified and to power modernisation of “archaic paper-based requirements which undermine the adoption of tokenised securities”.
In a new white paper published today, ASIFMA concludes that further education, collaboration and experimentation is necessary to address gaps in talent and liquidity and to reduce friction across a fragmented ecosystem.
The paper, entitled Tokenised Securities in APAC - A State of Play, draws on interviews and survey data conducted across the digital asset ecosystem (including trading platforms, issuers, banks, regulators and infrastructure suppliers). Sixteen firms contributed data through survey questionnaires and a further 11 via in-person interviews.
These respondents shared information on their technology platforms, their product portfolios and future development plans, along with their wider sentiments on the current state of the market and the requirements of a digital ecosystem.
The paper concluded that the tokenised securities space has come a long way in the past 18 months in delivering successful proof of concepts (POCs) within firms and on a multi-party basis.
Market participants and regulators are developing a deeper understanding of the benefits of tokenisation and, in some markets, financial authorities have developed sandboxes to further practical experimentation around tokenisation initiatives.
A problem with the current approach, centred on POCs developed by individual firms, is that this does not work towards a specific outcome. “Mostly experiments are currently used as a way for institutional players to familiarise themselves with the technology and risks involved,” says ASIFMA. “But as experimental metrics tend to be non-commercial, there is no real-drive forward, nor is there an industry-wide shared view of possible end states”.
With this in mind, ASIFMA says it is appropriate to explore a “regulator-endorsed, value/risk capped experiment” for the full tokenisation ecosystem, “as this would explore interactions, competitive dynamics and interoperability in one go”.
The association indicates that further work is needed around token classification to clarify whether a token should be categorised as a security or another type of regulated instruments such as a payment token or hybrid token.
Regulatory treatment tends to be dependent on the legal categorisation of the tokens and services offered by the provider, as well as whether these are issued via a public offer or private placement. This may also be dependent on whether the instrument is marketed only to institutional investors, or also available to retail buyers categorised as ‘sophisticated investors’.
ASIFMA director of technology and operations Laurence Van der Loo says: “Financial firms and issuers have been creating pools of expertise via practical experimentation. This has led to a better understanding of the risks, costs and benefits of the key performance metrics as well as better understanding of the interaction between distributed ledger technology (DLT) networks and adjustment business process and infrastructure.”
This includes a lack of regulatory harmonisation across jurisdictions, along with the persistence of paper-based processing and documentation requirements.
ASIFMA’s Tokenised Securities Taskforce advises that financial authorities should continue to liaise with industry firms to provide coordinated guidance on how tokens should be classified and to power modernisation of “archaic paper-based requirements which undermine the adoption of tokenised securities”.
In a new white paper published today, ASIFMA concludes that further education, collaboration and experimentation is necessary to address gaps in talent and liquidity and to reduce friction across a fragmented ecosystem.
The paper, entitled Tokenised Securities in APAC - A State of Play, draws on interviews and survey data conducted across the digital asset ecosystem (including trading platforms, issuers, banks, regulators and infrastructure suppliers). Sixteen firms contributed data through survey questionnaires and a further 11 via in-person interviews.
These respondents shared information on their technology platforms, their product portfolios and future development plans, along with their wider sentiments on the current state of the market and the requirements of a digital ecosystem.
The paper concluded that the tokenised securities space has come a long way in the past 18 months in delivering successful proof of concepts (POCs) within firms and on a multi-party basis.
Market participants and regulators are developing a deeper understanding of the benefits of tokenisation and, in some markets, financial authorities have developed sandboxes to further practical experimentation around tokenisation initiatives.
A problem with the current approach, centred on POCs developed by individual firms, is that this does not work towards a specific outcome. “Mostly experiments are currently used as a way for institutional players to familiarise themselves with the technology and risks involved,” says ASIFMA. “But as experimental metrics tend to be non-commercial, there is no real-drive forward, nor is there an industry-wide shared view of possible end states”.
With this in mind, ASIFMA says it is appropriate to explore a “regulator-endorsed, value/risk capped experiment” for the full tokenisation ecosystem, “as this would explore interactions, competitive dynamics and interoperability in one go”.
The association indicates that further work is needed around token classification to clarify whether a token should be categorised as a security or another type of regulated instruments such as a payment token or hybrid token.
Regulatory treatment tends to be dependent on the legal categorisation of the tokens and services offered by the provider, as well as whether these are issued via a public offer or private placement. This may also be dependent on whether the instrument is marketed only to institutional investors, or also available to retail buyers categorised as ‘sophisticated investors’.
ASIFMA director of technology and operations Laurence Van der Loo says: “Financial firms and issuers have been creating pools of expertise via practical experimentation. This has led to a better understanding of the risks, costs and benefits of the key performance metrics as well as better understanding of the interaction between distributed ledger technology (DLT) networks and adjustment business process and infrastructure.”
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