Regulators and Financial Institutions in APAC Waking up to Digital Asset Opportunities

Regulators and Financial Institutions in APAC Waking up to Digital Asset Opportunities

by September 3, 2021

In Asia Pacific (APAC), financial institutions and regulators are recognizing the potential of tokenized securities and exploring the concept. But despite recent positive developments, several challenges still need to be addressed, including regulatory heterogeneity and the need for deeper industry collaboration, according to a new report by the Asia Securities Industry & Financial Markets Association (ASIFMA), a regional trade association.

A tokenized security is a digital representation of a traditional security or asset such as a stock, a stablecoin, or a commodity. When leveraging technologies such as blockchain and distributed ledger technology (DLT), tokenized securities have the potential to bring about a reduction in settlement time, settlement risks, as well as administrative costs associated with, for example, know-your-customer (KYC) and reconciliation functions.

Management consulting and advisory firm Greenwich Associates estimates that US$1.7 billion per annum is being spent on blockchain initiatives across capital markets and banking globally.

By 2027, the World Economic Forum (WEF) predicts that up to 10% of global gross domestic product (GDP) could be stored and transacted via DLT, and an analysis by German digital asset startup Finoa suggests that the global tokenized market could potentially be worth as much as US$24 trillion by 2027.

Projected tokenized market volume until 2027, in trillion USD by asset class, Source: Finoa

Projected tokenized market volume until 2027, in trillion USD by asset class, Source: Finoa

Recent advancements in APAC around tokenized securities

In a new paper titled Tokenised Securities in APAC – A State of Play, the ASIFMA provides updates on key developments in tokenized securities across the region and shares insights from interviews with industry participants, including the Hong Kong Securities and Futures Commission (SFC), the Bank for International Settlements (BIS), blockchain technology specialist R3, Switzerland’s SIX Digital Exchange (SDX) and bourse operator Singapore Exchange (SGX).

Overall, respondents agreed that the market has come a long way in understanding the advantages of tokenized securities. This is evidenced notably by the acceleration in experimentation projects being initiated by financial institutions.

For example, in January, Deutsche Bank and Singapore fintech company Hashstacs (STACS) announced a collaboration for a digital assets proof-of-concept (PoC) project that would focus on sustainability-themed digital bonds.

In April, HSBC Singapore and Marketnode, the joint venture between the SGX and Singapore sovereign wealth fund Temasek, revealed that they had completed a digital bond issuance on Marketnode’s digital asset issuance, depository and servicing platform.

Such experiments and trials have led to a better understanding of the risks, costs and benefits of this new infrastructure model, industry participants told the ASIFMA.

Others have taken a pioneering role. Some have recently launched digital assets platforms, while the rest are gearing to. This is the case for Japan’s SBI Group, which is collaborating with Switzerland’s SIX to create an exchange to be launched in Singapore in 2022, and ibet for Fin, a consortium comprising Boostry, Nomura Securities, SBI Securities, and SMBC Nikko Securities, that operates a blockchain network for handling tokenized securities.

Regulators as well are acknowledging the benefits of tokenization, realizing that tokenized securities are here to stay. Across APAC, many have accelerated their learning journey, aided by industry players through, for example, regulatory sandboxes, while others including Japan, Hong Kong and Singapore have already issued some guidelines around tokenized assets.

Need for regulatory harmonization and deeper industry collaboration

Despite the positive developments, industry participants also highlighted key hurdles to overcome in order for tokenized securities to reach mainstream adoption.

In particular, they noted the heterogenous nature of APAC with a lack of consistency across jurisdictions, and called for regulators to work together to provide harmonized guidance on the classification and recognition of tokenized securities.

Darius Liu

Darius Liu

“Being a new development in the securities space, tokenized securities are currently not explicitly contemplated across the entire legislative and regulatory spectrum in most jurisdictions,”

Darius Liu, co-founder and COO of ADDX, a Singapore-based digital securities exchange, told the ASIFMA.

“As a result, platforms and entities involved with tokenized securities sometimes have to operate within the existing regulatory construct in an inefficient manner. One necessary condition for the maturation of the ecosystem will be a harmonization of legislation across all fields in a manner that is supportive of securities tokenization.”

On the technological front, interview respondents noted the fragmented nature of PoC projects, calling for more wholesome industry participation at every stage of the security lifecycle.

Julian Kwan

Julian Kwan

“If players in the market are only building their own private blockchains, those businesses are making it more efficient for themselves but are missing the real opportunity for global distribution and the connection with decentralized finance (DeFi) and cryptocurrencies which is where we will see an explosion of value,”

said Julian Kwan, CEO of InvestaX, a digital financing and investment platform licensed by the Monetary Authority of Singapore.