Tokenisation of financial assets: the next step in the evolution of investment

Using an explanation provided by global consulting firm McKinsey, tokenisation is the process of issuing a digital, unique and anonymous representation of a real thing.

January saw Larry Fink, the CEO of BlackRock, state that “the next step will be the tokenisation of financial assets, and that means every stock, every bond … will be on one general ledger.”

Last month, crypto asset exchange agency Mesh.trade launched its first public offering of tokenised preference shares for South African finance company Water Financial.

This allows investors to purchase a Water Financial preference share in the form of a token, on Mesh, which will pay investors a monthly dividend.

Water Financial has issued the preference share to raise R30 million to fund its lending business. 

If all this jargon has your head spinning, you are not alone.

While most people will be familiar with bitcoin, a crypto asset or token created through the bitcoin blockchain, what few people are aware of is the ability to use blockchain to tokenise mainstream financial assets. 

TOKENS REPRESENT ASSETS

An explanation provided by global consulting firm McKinsey defines tokenisation as the process of issuing a digital, unique and anonymous representation of a real thing.

Tokens can represent assets, including physical assets such as property or art, financial assets such as equities or bonds, intangible assets such as intellectual property, or even identity and data.

It is sort of like a piece of paper saying that you own a specific asset, maybe a gold bar. You don’t want to carry the gold bar around to prove you own it, but the piece of paper confirms your ownership.

However, tokenisation is so much smarter because the digital token can be programmed with code which controls the token. This is known as a smart contract. 

This contract means the token knows who its owner is and can execute actions.

Once a transfer takes place, the smart contract can update you on its new owner. It also knows what it needs to calculate.

For example, a token knows when to pay out a dividend or when a contract has expired.

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It effectively automates many of the administration processes that a fund manager or administrator would undertake.

It is a lot safer than a piece of paper, which can be stolen or fraudulently amended to change ownership.

A digital token can only be created and changed through a blockchain – a network of computers that independently verify all transactions through what is known as a digital decentralised ledger.

There is no single entity in charge of updating the information. As new data is added to the network, a new block is created and added permanently to the chain.

This means no one can remove that data. All nodes, or computers, on the blockchain are then updated to reflect the change.

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As Connie Bloem, the managing director of Mesh.trade explains, if something happens to Mesh.trade or someone acts not according to how they said they would act, the blockchain would retain all the information and keep the transactions transparent.

The financial record is no longer reliant on a single entity. In summary, a token is a piece of computer code that tells someone what the asset is, who it belongs to and what the asset can and cannot do.

This code can never be deleted. This could bring great efficiency and cost savings to the investment world. While tokenisation of financial assets is still in its infancy, fund managers such as BlackRock and Franklin Templeton are already using tokenised money market funds. 

According to analysis by McKinsey:

“Specifically, we expect that organisations working with certain asset classes will be the quickest adopters; these include cash and deposits, bonds and exchange-traded notes, mutual funds and exchange-traded funds, as well as loans and securitisation.”

While tokenisation can improve efficiency for mainstream financial instruments, its appeal will lie with those entrepreneurs who want to raise capital for expansion or growth.

Listing instruments on the traditional markets is extremely onerous and expensive, and crowds out smaller capital raisings. 

“The South African economy needs its entrepreneurial base to keep on growing because that’s the base that generates jobs and also increases or empowers the economy. So that is our segment, but it’s not being served by the traditional network,” says Bloem. 

これは中小企業にとって朗報であり、投資家にとっては市場にまったく新しい投資機会をもたらす可能性があります。

ウォーター・フィナンシャルが発行した優先株が良い例です。この場合、トークンは金融商品であるため、優先株を 1 つ購入すると、トークン 1 つと同等になります。

ブルームは次のように説明します。

Water Financial は、70 歳以上の住宅所有者に、月々の分割返済をせずに、住宅の資産をローンの形で解放する機会を提供します。

これはリバースモーゲージまたは株式リリースとして知られており、ほとんどの先進国市場では非常に大きなビジネスです。

多くの退職者は資産です

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