Russell Barlow, Global Head of Alternatives, abrdn, explains the role of tokenisation in the future of investment
Imagine an investment world where you can own an area of a piece of artwork, such as the smile on Leonardo Da Vinci’s Mona Lisa. Or perhaps one square inch of a luxury Manhattan penthouse, or one hundredth of a single Microsoft bond. This is what the world of tokenised investment promises.
Crypto-assets, blockchain, tokenisation and other distributed ledger technology are all still in their infancy, but the exciting technology being developed in this sphere is going to revolutionise the investing landscape. In this space, there’s three key trends to watch out for: the growth of digital securities (or tokens), the growth of digital exchanges and service providers, and a rise in digital funds and products. Ultimately, we could see the majority of “traditional” investments brought onto blockchains, opening up a wider range of opportunities to a much bigger audience of investors. In the future, it’s likely that asset managers will offer funds in token form, as well as having the ability to convert the ownership of assets such as private debt and real estate into digital tokens.
So how to begin to understand this complex world full of new jargon?
Let’s start with Distributed Ledger Technology (DLT) often referred to as blockchain, but in reality blockchain is just one type of DLT. This refers to information being recorded on a ledger; but unlike a traditional ledger, the DLT uses encrypted computer code and can’t be altered.
If we can get technical for a moment, DLT’s are a ‘shared, immutable ledger’ that can be used to record transactions and asset ownership in a network. These ledgers are seen as secure enough to create new crypto-assets, such as Bitcoin and the tech allows people to buy, sell and trade these assets 24/7 online. DLTs are also seen as secure and scalable enough to create and record other activity such as ownership or to verify that an action has been taken. It is fully traceable and can’t be altered, meaning that others can rely on the information stored on the ledger to be a reflection of ‘truth’.
So what is a token, or ‘tokenisation’? This is a process that allows a private piece of data, such as bank card details, or ownership rights of an asset, to be replaced by a ‘token’. The sensitive data is still stored securely for reference and still needs strong security. The digital token can be securely registered using DLT and it can also be fractionalised, meaning that in the future, you could own a square foot of a farm, or 10% of a vintage bottle of wine or 0.5% of a bond. Crucially, tokenisation means that, should you wish, you can then sell that square foot of a farm relatively simply and without the expense and admin that goes with selling physical land. The ways in which tokens could be used is limitless.
One important concept to grasp is that a token can represent either a real, physical asset or a ‘virtual’ asset that exists only on a DLT network (‘on-chain’) such as a crypto coin, or a piece of digital art (also known as a non-fungible token or NFT). This is what investors are beginning to get excited about, as real assets can now be ‘tokenised’ and then that token can be fractionalised into much smaller parts.
This evolving technology requires new financial infrastructure and that’s where digital trading platforms come in. Archax for example, is the first ever digital securities exchange regulated by the FCA in the UK, bringing together the benefits of DLT to provide access to these new investment opportunities alongside applying this technology to the existing investment space. As you would expect, the speed of execution when it comes to digital trading is ‘atomic’ – meaning that settlement is instantaneous – trading 24/7, 365 days of the year. This allows investors to trade irrespective of the time zone they’re located in and they benefit from instantaneous settlement, which not only enables faster access to their capital but also brings greater operational efficiencies.
In an era where cybercrime is a huge concern for all, instant access to markets any time of any day and the speed of settlement can be a concept that’s hard to fathom. However, DLT security should make transacting much more secure as there will be a digital ‘ledger’ or record of transactions and ownership, which can speed up buying and selling and make the admin and record-keeping around transactions much more straightforward.
It doesn’t stop there. As well as assets, loans could also be ‘tokenised’; a start-up looking for funding could issue asset tokens for much smaller amounts than before and raise money more quickly.
With the potential to offer greater transparency, greater speed and less trading friction by using these digital technologies, the future of investing is looking exciting. Indeed, the scope of the opportunity here is limited only to the creativity of issuers and the assets available.
This article was first published in the November 2022 issue of Professional Paraplanner.
