Investment

Tokenisation – a primer for family offices

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The family office led by Asian property billionaire Tang Shing-bor, nicknamed the Shop King, is backing plans to introduce Hong Kong to fractional ownership through tokenisation, the latest buzz word in the world of fintech.

Stan Group, its financial services arm, chaired by his son Stan Tang Yiu-sing plans to discuss the idea with Hong Kong’s regulator, the Securities and Futures Commission, in the near future.

Tokenisation evidently has some way to travel towards acceptance. But the potential benefits are so great, and the investment opportunities so vast, that family offices would do well get to grips with it all

It has signed a contract with digital provider Liquefy to tokenise the rights and responsibilities of ownership through blockchain technology rather than using third-parties to issue shares, at vast expense. Through the system, transaction records are kept on the blockchain every time a token changes hands, providing growing trust in its decentralised accounting approach as trades multiply. 

Stan Group, which owns property worth $6.4 billion, believes tokenisation can breath new life into Hong Kong’s flagging property market, as investors get the choice to buy and trade tokens, as well as entire buildings. 

Others argue tokens can be a convenient way to buy and sell interests in private assets like real estate, fine art, trade finance, private businesses and venture capital. The trend could have ramifications for family offices who own real estate and could use tokens to raise finance and incentivise its managers. It could decentralise blockchain payment and settlement systems in currency platforms. 

Smart contracts could end the duplication of paperwork and collapse industrial supply chains. And family offices will also be aware there will be no shortage of people seeking to fund their pet projects. As ever, forewarned is forearmed.

Last year saw plans to tokenise apartment blocks in Manhattan and South Carolina. Masterworks has pledged to tokenise works of art.  The World Bank has developed a blockchain approach for a short-term debt issue. The German stock exchange has confirmed plans to use blockchain for collateral swaps. 

Fintech firm Fluidity, led by former Morgan Stanley trader Todd Lippiatt has developed ways to trade tokens through AirSwap and aims to use them for mortgage finance.

Web3 Foundation has closed on a private sale of tokens to Chinese investors, to raise funds for Polkadot, which helps blockchain networks co-operate. The deal is said to value the project $1 billion. UK-programmer Gavin Wood, the co-founder of the Ethereum platform used for token development, is developing it.

Facebook has used tokens to raise $10 million a pop from 28 corporates who have agreed to join the Libra Association, which is dedicated to establishing a stable cyber currency. 

The hope is that initiatives like Libra will foster a currency whose price will be more stable than Bitcoin. In a September 2018 review of Initial Coin Offerings the year before, EY found that 86% traded below issue price, with 30% losing much of their value. 

The Chinese are unimpressed with the track record, have threatened to ban crypto-currencies altogether, although this is unlikely to undermine their potential use of the blockchain and tokens.

David Sacks, former Pay Pal chief operating officer, backs Harbor, a leading token compliance platform. Its chief executive Joshua Stein dreams of trading tokens “24/7/365 around the globe with near instantaneous settlement, no counterparty risk.” 

Goldman Sachs and venture capitalist Jim Breyer are among the backers to Jeremy Allaire’s crypto-currency firm Circle, which has just bought a crowdfunding platform to tokenise its dealings.

UK asset manager Schroders believes blockchain transactions can avoid duplication and achieve greater efficiency in business dealings. The insurance industry, it says, could avoid layers of administration with their smart contracts.

Joe Lubin, another co-founder of Ethereum, compares the global financial system to a series of walled gardens: “This loosely knit network is often extremely inefficient when jurisdictions or currency boundaries need to be crossed, exposing participants to risk, delays, and high operational costs.”  He believes a decentralised system based on internet platforms is the solution to this back office problem.

Professional services group Deloitte argues that the disruption of the security value chain from issuance to custody, settlement and beyond can make tokens the security instrument of the future.  

But it stresses that regulatory approval is needed to ensure tokenisation takes off. Regulators are prepared to concede it could improve transparency, eliminate duplication and streamline administrative procedures. Tokens could also improve funding alternatives for venture capital and affinity groups, including soccer and baseball fans, according to Harbor.

Regulators get sniffier, however, when they look into the way blockchain trades are validated by computer programmers known as miners. Their actions confirm transactions, prevent trades by unauthorised parties and maintain faith in a decentralised market. 

The Swiss-based Financial Stability Board which monitors the global financial system warned tokenisation could lead to a concentration of risks, where a limited pool of miners dominates the validation process. Disruption to this process, possibly due to cyber attacks, could damage market integrity.

In its research paper, Decentralised Financial Technologies, FSB also warns: “If tokenisation were adopted more broadly, it is possible that it might create an appearance of liquidity in assets that are inherently illiquid.” An absence of liquidity in bricks and mortar, for example, could produce a much lower price than tokens: “Risks could arise where there is a liquidity mismatch.”

The mining process is also wasteful of electricity, cited by the Chinese for its crypto-currency ban. But the liquidity issues, which led to Bitco’s volatility could also be an issue, as far as they are concerned. 

Tokenisation could also throw up governance and accounting issues: “These include the question of whether software developers, system operators or users can be held responsible if contracts do not function as intended.”

The FSB concludes it is hard to see the direction of travel for a decentralised financial system. But it does express concern that protagonists, including those in the technology centre, have only had “limited interaction” with regulators to date. 

Tokenisation evidently has some way to travel towards acceptance. But the potential benefits are so great, and the investment opportunities so vast, that family offices would do well get to grips with it all.

 If nothing else, they need to be alert to exaggerated claims in a sector which is great at announcing initiatives, but a less good at developing them.  

2 Comments

  1. At this point – and for some time the future – using the term “tokenizing” in the context of real estate and most other assets is both technically as well as legally incorrect. To meaningfully separate the instrument from existing digital technologies, “tokens” must be understood as digital bearer instruments that can be transferred peer-to-peer. As long as transfer prerequisites do not exist as standards on a public main-net, the P2P quality can simply not be present.

  2. some general idea’s mentioned in the above give a certain guideline but ….. multiple items in the above text are not completely accurate either ..which doesn’t help the understanding of the tokenised economy for none specialist – that’s a pity and a missed opportunity.

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