The world of retail investment stands on the cusp of a new era of democratisation, and Asia is leading the way.
While the migration of financial markets to the Internet delivered investment to a wider public, the spread of that particular revolution was limited by several factors. Access was dependent on a reliable online connection, minimum buy-in limits, and the credentials required to open brokerage accounts. As a result, investment opportunities remained beyond the reach of many in Asia.
Despite significant progress in recent years, and the rapid recent advancement of the digital economy in the region, a large percentage of people – about 70% in Southeast Asia[1] – remain on the fringes of mainstream finance, or locked out completely.
This is about to change.
According to widely cited research conducted by Google and Singapore’s state-owned wealth fund Temasek, expanding digital financial services will be a key future driver of regional prosperity. [2]
To a degree, this is already evident. The explosion of app-based finance, accelerated by the pandemic, triggered a flood of technology in Asia that’s opened up new opportunities for people at all levels of society to participate in the dynamic growth of the region, which emerged comparatively unscathed from the market turmoil of 2022.
Consumers don’t necessarily need bank accounts to open, use and top-up digital wallets, and services from both financial and non-financial companies are enabling payments, purchases and, critically, investments on a scale never previously possible.
Tokenisation of investable assets is among the most important tools we have to advance the goal of financial inclusion and digital access in Asia even further.
According to World Bank data, the average lower-middle income individual in the East Asia-Pacific region would have to save for at least 60 months to own one share in each of the top five listed companies by market capitalisation. Tokenisation can change that by breaking down both conventional liquid assets and illiquid asset such as real estate, shares, and even art into units that represent small fractions of a whole.
Tokenisation is the ultimate expression of a digitalised, cost-efficient investment world, transforming how investment vehicles are manufactured and distributed, opening up the world of collective investments.
Tailored solutions
Tokenisation provides greater transparency, more choice of product for the end investor, and a more immediate purchasing process that eliminates intermediaries and cuts costs. Micro investing becomes a lot simpler and more efficient, and product types that are currently only the realm of large institutions can be made available to the masses, enabling managers to better tailor solutions to meet client outcomes.
The opportunity is enormous, and Asia is forging ahead in the race to capture it. Economic and demographic conditions – young population, high internet penetration rate, surging middle-class, a huge generational wealth transfer – are ideal, and major institutions are waking up to the potential of tokenisation in the region.
Hong Kong’s government issued the world’s first tokenised sovereign green bond in February this year; a HK$800 million one-year offering.[3] Swiss bank UBS issued its first tokenised debt securities for Asia-Pacific wealth management clients in December 2022.[4]
The Thai government, meanwhile, is working on an “investment token” licence that will enable entrepreneurs to tokenise government bonds, carbon credit trading, foreign exchange, electricity units, and other assets.[5]
In Singapore, the government launched Project Guardian last year, a full-scale project to look at the adoption of digital assets across the financial industry, and took an important step toward the real-world adoption of digital assets with the launch of a first industry pilot in November.
As part of that test, Singapore bank DBS announced that it had piloted foreign exchange and government securities trading on public blockchain through Project Guardian, prompting one bank official to comment that by using tokenisation “the standards by which financial institutions currently deal with each other can be transformed and re-imagined for greater efficiency and transparency”.[6]
Triggering transformation and regulatory reform
There are still obstacles to overcome. Large parts of Asia lack adequate infrastructure, and much work needs to be done on digital and financial literacy to diminish the growing risks of hacking, fraud, and other cyber-crimes. Governments will also need to design regulatory regimes that accommodate the transformations tokenisation will deliver.
Around the region, the process has begun, albeit at different speeds. Singapore and Hong Kong are already well advanced. Countries such as Thailand and the Philippines are putting digital IDs in place – an important pre-requisite for widespread digital financial service rollouts – while India has put a Central KYC register in place to “reduce the burden of submitting KYC documents…when starting a new relationship with a finance company.”[7]
These are important first steps, but ultimately the thing that presses the “Go” button on tokenisation will be clear advantages to the consumer. Once regulators see the benefits the model brings to the asset classes on which it’s initially tested, the process of regulatory approval will be expedited – and there are strong signs that this is not only already happening, but will start to accelerate rapidly.
A new way of operating
Then there is the issue of adoption by the industry.
Being able to be historically compatible is a key challenge, and large firms burdened with cumbersome legacy systems want to see simple, plug-in solutions that doesn’t involve expensive and lengthy re-platforming or project costs.
At the moment, only Calastone is offering those solutions.
Rather than manipulating the existing mutual fund mechanism and intermediary chain, we are deploying a digital marketplace; a completely new way of operating that directly tokenises collectives of assets for distribution to the mass market, using our Distributed Market Infrastructure.
The opportunities for asset managers to individualise products for market differentiation along with the ability of creating an efficient, scalable business without the need for a significant overhaul of an investment management system will change the investment landscape. Managers can now expand their universe of products without an increase in cost, and also manage the speed and scale of the transformation by handling traditional and digital assets within the same existing Calastone distribution network.
As regulators start to develop frameworks for tokenisation in Asia, Calastone is building the practical infrastructure that will herald a new type of collective investment, and in the process help transform the economic and social fabric of the entire region.
(First published in Business Times 04/23: https://www.businesstimes.com.sg/wealth/wealth-investing/triggering-transformation-how-tokenisation-reshaping-asias-investment)
