Beyond Asset Tokenisation

Much has been said about the power of tokenisation to fundamentally change how investments and assets are represented, managed, distributed, and monetised. It’s no longer a matter of if, but when digital assets are going to transform the financial services industry. Industry players, particularly in the world of asset servicing , need to stay ahead of this transformation. How will asset tokenisation reshape the role of securities services providers in an evolving digital assets space, and what does the future hold?

Tokenisation is here to stay

There is no doubt that tokenisation is here to stay – regardless of what happens to the crypto world. Tokenisation of traditional assets can be seen as simply the next evolution in asset representation, and the most forward-thinking financial institutions are looking towards the tokenisation of traditional assets. Just as the shift from physical to dematerialised forms of asset representation changed capital markets, the adoption of tokenised assets will accelerate growth and spur product innovation.

Essentially, anything featuring property rights and economic value can be tokenised. Examples include traditional assets such as debt and equity (whether listed or private), alternative investments such as carbon credits, precious metals and exotic assets such as collectibles, artwork and sports teams. The opportunities are limitless in terms of types of tokenised products that can be created. Tokenisation can improve efficiencies across the asset lifecycle, increase transparency, and improve liquidity for currently illiquid assets.2

Tokenisation can act as a catalyst to speed up transformation across financial services. Tokenisation, and the broader growth of the digital world is altering how asset servicers operate, and how they service their clients. With tokenisation, some market intermediaries will be displaced, others will evolve and new entrants will materialise. Still, no matter which form assets are represented in, trust will still be key to the smooth functioning of the financial sector. Institutional investors will continue to partner with safe and reliable intermediaries who can bring the certainty and security of the traditional securities market to digital assets. Transformation of asset representation will be a journey, and this will take time. Therefore, traditional and digital assets will continue to co-exist in a hybrid financial ecosystem as the underlying infrastructure matures.

Preparing for tomorrow

As the industry moves towards building production grade infrastructure for digital assets, it will be important for operators of asset tokenization networks to establish connectivity to existing systems and infrastructure. Currently, operational and technical complexity are barriers to entry for participation on these networks. Integration via existing channels can help to accelerate adoption of tokenized asset networks by a wider range of market participants. Another key consideration is the development of inter-operability across various digital asset networks. We believe that the benefits of distributed ledger technology (DLT) as a technology can be fully realised when we have networks that are connected, operate on interoperable standards and when assets can be moved across networks.

Participating across various asset networks is an essential part of the development of next-generation asset origination and distribution ecosystems. HSBC has developed capabilities in this space, recently launching HSBC Orion – a proprietary DLT-based tokenisation platform enabling issuance and servicing of digital bonds. The European Investment Bank (EIB) has issued the market’s first-ever GBP tokenised bond for registration and issuance under Luxembourg law3 using HSBC Orion.

HSBC sees the changes in the development of digital assets as part of an important evolution in the infrastructure underpinning the financial sector and the development of asset tokenisation. HSBC has worked with the Hongkong Monetary Authority (HKMA)4 on their HKD800m 365-day Reg S inaugural tokenised green bond issuance for the Government of the Hong Kong Special Administrative Region of the People’s Republic of China (HKSAR) on Goldman Sachs’ Digital Asset Platform. HSBC was one of the participating banks, and played a few key roles such as Market Practice Adviser, Joint Lead Manager, Central Moneymarkets Unit Lodging and Paying Agent and Custodian. In Singapore, we are actively participating in Monetary Authority of Singapore (MAS)’ Project Guardian. HSBC is also partnering with Marketnode, a SGX Group and Temasek joint venture and digital markets infrastructure operator, and United Overseas Bank to take the tokenisation of financial and real economy assets one step further into wealth products.

What lies ahead?

Growing demand and the creation of new products and assets will lead to the evolution of business models, from service-based to platform-based models, as custodians and securities services providers adapt to a world where dematerialised and digital assets coexist, across centralised and decentralised systems.

We see custody as the foundational infrastructure for the development of other digital assets products and services. Custodians have an opportunity to extend their service propositions and capitalize on a range of new opportunities in this space, becoming trusted infrastructure providers for their clients as they look to build capabilities in this new digital ecosystem.

You can read the full ‘Beyond Asset Tokenisation’ paper, co-authored by Northern Trust here.

Zhu Kuang Lee Managing Director Chief Digital, Data &

1.https://www.spglobal.com/en/research-insights/ featured/special-editorial/look-forward/toward-atokenized-future

2.https://www.oecd.org/finance/The-Tokenisationof-Assets-and-Potential-Implications-forFinancial-Markets.pdf

3.https://www.eib.org/en/press/all/2023-030eib-issues-its-first-ever-digital-bond-inbritish-pounds#:~:text=Today%2C%20the%20 European%20Investment%20Bank,Orion%20 %E2%80%93%20the%20bank’s%20 tokenisation%20platform

4 https://www.hkma.gov.hk/eng/news-and-media/ insight/2023/02/20230216/