When the Stock Exchange of Thailand Set Out to Disrupt Itself with Digital Asset Technology.
Digital Asset and Blockchain are the words we are hearing more and more, especially in the competitive financial businesses which are looking for a new way to reduce cost and create a new opportunity to increase the profit from the new business model.
At the moment, we are not going to ask “whether the digital asset is coming?” but we will rather ask “When” or “How” digital asset is coming.
And the most important aspect is how the digital asset will impact the financial businesses in the near future?
I was fortunate to be invited to attend the SET Digital Asset Industry Forum: Shaping the Future of the Capital Market event recently. SET (Stock Exchange of Thailand) announced their new initiative which is their new Digital Asset Platform.
SET is building the asset tokenization and exchange platform on the blockchain. They brought the global leading consultants like Blocksize Capital, the technology expert and the University of Cambridge, the legal expert as they aim to be the global platform rather than the local platform in Thailand.
That seems to be the right fit as the top 2 challenges in this enterprise blockchain business area would be regulation and business transformation.
The images in this article are from the presentation in the forum, for the full presentation, please check the link here.
Explaining the Terms
Feel free to skip this section if you already know.
Blockchain = Immutable data record store and processor. It provides a trusted distributed system without relying on any single middleman. In simple terms, thinking of the database that no one, neither system admins nor country’s presidents can tamper (if it is distributed enough).
It is one technology of DLT (Distributed Ledger Technology). But it is also not wrong to use Blockchain and DLT synonymously.
Tokenization = The process of converting traditional assets into the digital asset token on a blockchain. The asset owner will receive a token representing the ownership of the asset, which can be transferred to others easily through the internet.
Digital Asset = The digital token representing the ownership of assets. Cryptocurrency like Bitcoin can also be included as the digital asset as it represents the ownership of value despite it does not have any traditional assets behind.
Smart Contract = A program we can write into a blockchain network to represent a rule or a contract for making a transaction without the need for any people to enforce it like the law. This smart contract is an important part of a blockchain that makes digital asset to become programmable money.
For example, the real estate developer is selling the room by issuing the digital asset. They can choose to write the smart contract to limit the buyers to the whitelisted people and 1 person can only buy 2 rooms at most. And the smart contract will take care of the transaction automatically.
Summary
In the event, several experts came to give the ideas from what DLT or Blockchain is, what SET is going to do, to trends, use case and regulation. The key objective of the forum is to brainstorm the ideas on digital asset and to seek the partnership to build the business use case together with SET.
1. The digital revolution of blockchain is just starting.
As a smartphone took 15 years to mature, blockchain which is at the emerging state will become the mainstream in 10 years or so.
We are seeing the actual benefit of adopting the technology by having less intermediaries to process as well as being on the same platform. It brings us the speed of transaction settlement, transparency of transactions, ease of auditing and huge cost reduction.
2. Nearly half of live blockchain networks have been launched by the Finance and Insurance sector.
“Blockchain networks facilitate the secure exchange of information between a set of participants and enable data verification and integrity checks via a consistent audit trail.”
— Cambridge’s Global Enterprise Blockchain Report
From the key features Blockchain, no wonder the industry that would benefit the most is the banking and financial industry which is becoming more efficient and secured in operation.
And from the market data, the cost reduction is the predominant objective of current enterprise blockchain networks.
“This situation is a testament to the early days of the enterprise DLT ecosystem: most production networks are still in the phase of eliminating reconciliation efforts to streamline the exchange of information between participants and optimize existing workflows.”
— Cambridge’s Global Enterprise Blockchain Report
3. Digital Asset is the main use case SET is adopting.
In general, when we talk about digital asset. We are talking about the digital asset which is tokenized from the valuable assets whether they are stock, bond, money or digital content. We can also say that the cryptocurrency is a digital asset, but it just does not have any underlying asset.
SET believes the future of assets and exchange will be the digital asset, so they are moving toward the general digital asset tokenization platform.
The platform is focusing on the investment purpose in the beginning and planned to gradually expand to banking, product, services and payment. One of the big problems we also need to solve is the high barrier of entry for people either from the complexity of the technology or the regulatory requirements.
4. SET Digital Asset Platform is going to transform the capital market together with the partners.
The business model of the digital asset platform is going to change considerably compared to the existing stock exchange platform. Instead of SET being the center of all activities, the members and partners are going to be a part of each activity on the platform.
However, the big challenge will be building the business use case out of it. So SET wants to brainstorm to collaborate with the businesses to build the use case together.
5. Digital Asset is bringing a new business model to the broad industries.
Tokenized stock is one of the use cases that is easy to understand. Today, it is very hard for us to transfer stock to someone. Even just buying and selling a stock, it takes 1–2 business days to receive the money (not to mention, it also requires some paperwork behind).
With stock as a digital asset, anyone can transfer the stock to others and get settled in seconds instead of days without having anyone to process your documents behind. How much money and time we can already save with it?
Also, the system will be open to be connected and processed from other systems by default, providing opportunities to automate most of the related activities as well.
Not only securities but the other areas of business can also be transformed with the digital asset.
6. Digital Asset is challenging the existing capital market players while creating a new opportunity for new players.
From the 2 slides above, it could give us some ideas on how digital asset will change the security issuance process. The key part is the smart contract which automates the exchange of different tokens, which we can also call “Atomic swap”.
The Atomic swap is similar to the automated escrow system which ensures the successful or safe failure exchange of both parties.
This smart contract will remove the need of using a middleman to process the transaction, and at the same time bringing the new problems and opportunities for the new players.
The coming of the digital asset will push the existing players to adapt themselves, especially the middleman with red blocks in the presentation above while improving the benefits and experiences for the issuer and investors.
7. The regulation will be a big factor in the success of the Digital Asset business.
As digital asset involves several parts, money, securities, payment, etc., it brings the attention and challenge to several regulators such as Bank of Thailand, SEC and Anti-Money Laundering Office.
Having the right balance of regulations would be important for the industry.
Interestingly, Liechtenstein has announced TVTG (a.k.a. Liechtenstein’s blockchain act) which is quite innovative in the point that the regulation is flexible and understands the role of the digital asset well.
“Within this framework, a token serves as a container with the ability to hold rights of all kinds, whether that be the right to something represented — examples including real estate, stocks, bonds, and gold; or nothing.
[…] transfer of a token on a TT system constitutes a binding transfer of the underlying right, whether that be a right to a physical object or a digital asset.”
— TVTG (Liechtenstein’s blockchain act) Summary
With their token container model above, it has already laid the framework for the future of tokenization where people can transfer the ownership of virtually anything to others. So the future of STO (Security Token Offering) or asset tokenization is becoming a little closer.
If you are interested in the Liechtenstein’s blockchain act, Philipp Sandner has written an insightful thought about it in the article below.
Verdict
This move of SET to disrupt itself with the digital asset is considered quite interesting as it is one of not many big financial institutes who are moving to this young area.
Despite it is not yet clear which use cases or partners SET Digital Asset Platform is going to start with. It is certainly an opportunity for the financial business and the financial technology startup who seek to tackle the new problems coming with the new wave of technology. They could be digital asset custodians, digital asset auditors, smart contract auditors or best execution providers.
The exciting future of the digital asset might come earlier than we think.
“The future is already here — it’s just not evenly distributed.”
― William Gibson
I would like to express my gratitude to many people here who are the important parts of this article. 😊
- Stock Exchange of Thailand, Blocksize Capital and University of Cambridge for sharing insightful information.
- Philipp Sandner for being a nice speaker and helping review the content.
- Kanokwan Norasetkul for the invitation.
- Phoom and Thomas Haßler for the content reviewing.
The data references can be found in the links below.
