A couple of weeks ago I had the opportunity to do a presentation on Asset Tokenisation on DLT in front of a Blockchain gathering in Sofia. Bulgaria has a strong crypto and blockchain community so such topics are quite familiar to the local developers and traders. Doing research for the lecture I got the chance to delve into this promising new aspect of blockchain where digital tokens are backed by and represent physical assets or assets with real economic value.
With the recent rise and fall of the ICOs, the struggle to bring regulation into the digital token markets remained, preventing the blockchain technology from being introduced to enterprises. It is because of companies like our partner R3 that unification of tech and legal requirements is now possible. Aspects like custody and settlement are available on Corda and the legal and post-trade perspective is crucial for such technology to be introduced to large businesses.
“In fact, I also soon expect to see tokens that were first issued on public blockchains being immobilised in place and ‘teleported’ over to Corda to take advantage of Corda’s superior transaction finality, regulatory friendliness, strong identity layer, and tight integration with the existing financial system.”
Richard G. Brown R3, CTO
What is an Asset?
“An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company’s balance sheet and are bought or created to increase a firm’s value or benefit the firm’s operations.”
What is Asset Tokenisation?
“The tokenisation of assets refers to the process of issuing a blockchain token (specifically, a security token) that digitally represents a real tradable asset” Deloitte
How can Asset Tokenisation Change Capital Markets?
The main purpose of capital markets is for savings to fuel the economy by channeling investment. The ratio of available capital to capital raised by companies is increasingly low. This would mean that the capital markets at their current state are not doing the job they’re supposed to or at least not at successful levels. Issuing securities and raising capital is a fairly complex process where every bank has its own ledger and a custodian has to do the bookkeeping, whereas on the blockchain the system does the bookkeeping itself. So bringing in custody and settlement finality will change the game for the current players (custodians, banks) and bring in new ones (the R3/Corda network of companies among which are many of INDUSRIA’s clients and partners). Setting up this digital structure into the existing capital markets will allow existing players to issue new products in a tokenised fashion and at the same time expose completely new asset classes to the investment market.
What is Settlement Finality?
“Settlement finality is a conceptual construct often used in statutory, regulatory, and contractual literature. Finality of settlement ensures that transactions made over payment networks will, at some point, be complete and not subject to reversal even if the parties to the transaction go bankrupt or fail.”
Why Are Native Tokens Limited Compared to Asset Backed Tokens?
While Assed-Backed Tokens are a digital representation of something held elsewhere — usually physical assets or financial products like bonds, debt or equity — Native Tokens do exist solely on a ledger. They’re not related to physical goods and administration relies on computers or “miners”, who are the ones verifying transactions. Being of a totally dematerialised nature, this token cannot be custodial by a third party, which is where its limit comes:
“Most native tokens in circulation today exist to power features of decentralised applications, including CorDapps — applications built on top of the Corda platform. Often, these digital assets provide a utility, facilitating services or units of services that can be purchased. They can be compared to API keys, used to access a service.”
Digital Assets:Transforming Capital Markets by Todd McDonald, Co-Founder at R3
How can DLT Help?
Corda is the only DLT platform which takes into account the needs of enterprises — namely, direct transactions, strict privacy, reduced transaction and record-keeping costs, and streamlined business operations. Its permissioned nature introduces the aspect of strong identity, which, in stark contrast with permission-less blockchains, adds trust to the world of B2B trading — something which adds tremendous value to the end user transactions and inspires companies to translate Blockchain into the language of businesses.
Another exceptional advantage of the platform is its interoperable nature, which allows different assets to be traded on the same network. This complex transacting will help bring more players and even marketplaces, such as digital exchanges, to the ecosystem. This will inevitably contribute to attracting more investments and creating an effortless instant trading experience. Settlement, transaction finality and custody are also functions that Corda users can rely on.
Moreover, smart legal contracts are one of the platform’s features:
‘A smart legal contract is a legally binding agreement that is embodied in digital form and that has at least some terms and conditions represented in computer code.’
Corda Token SDK was announced yesterday. By definition, this is a developer toolkit and a set of standards that will do for Corda what ERC20 did for Ethereum. Here’s a few ways Token SDK will bring standardisation to token issuers on Corda:
- A common way to define types of token
- A common way to issue tokens
- A common way to use and trade tokens
To sum up, not only does a DLT platform like Corda bring the legal and identity aspects to the table, but it allows for a global marketplace to be set up for business in a seamless, frictionless and scalable blockchain manner.
Is there legal background to what we are doing?
Along with R3, INDUSTRIA Technology has partnered up with financial regulators and major players in the Legal Consulting industry to provide an end to end solution to your Asset Tokenisation platform. From the beginning, R3’s platform was designed to be compliant with regulation, governments, and financial criteria, and to provide secure trading and scalability.
Use Cases for Asset Tokenisation
Asset-backed tokens can be a solution to trading numerous illiquid assets, such as corporate debt or equity, corporate bonds, real estate, education and many more. Let’s take as an example the most illiquid asset with the slowest rate of sale — real estate.
At INDUSTRIA we have seen an increasing number of customers looking to tokenise on real estate and other physical assets in order to bring more exposure and speed of investment and transacting. Usually, when selling real estate, there are too many parties involved, it is mostly sold locally (in the country or city where the asset is located), and a sell would take very long with little to no guarantee for the buyers. This generally drives less interest into the market and makes it difficult for fresh investments to be distributed globally.
Another drawback of the current way of trading is automation and share management, which are very complex and time-consuming when resolved in a non-digital manner. It is very difficult to invest in real estate with a lower entry — the tokenisation of such assets will attract smaller players, which would inevitably increase the market’s size and flexibility.
Imagine you’re trying to fund a 50-story corporate building which can be split into multiple stakes — asset-backed tokens which represent your building. Setting up the tokens on a platform like Corda will not only bring the security and settlement required for an investment of this, but it will also bring a whole new channel for generating investments. This way, increasing the liquidity will come without disrupting the traditional way of trading assets.
As it is a blockchain-based system, each and every token will be stamped with the full financial and identity history of the property in order to avoid any fraud and double spending on the same assets. Allowing 24/7 transactions and market availability will totally change the future of numerous markets. In other words, millions and billions of dollars of investments from all around the world are becoming available in a secure and seamless way and this is already happening on Corda.
Corporate bonds is another market suffering illiquidity. The bond market is an example of a very low-tech and slow paced environment where you can rarely find what you are looking for. In order to access a wider choice of bonds to invest in, traders have to log into multiple different electronic platforms which is time consuming and ineffective.This is perfectly defined in Digital Assets:Transforming Capital Markets paper on tokenisation:
“Blockchain would also add resiliency to a currently fragmented corporate bond market. Tens of thousands of corporate bonds are in circulation at any given time, with hundreds of dealers providing prices across multiple different electronic platforms.”
Digital Assets: Transforming Capital Markets by Todd McDonald, Co-Founder at R3
What he means is that, if put on a blockchain-based registry, bonds can be searched by specific criteria and all information will be updated in real time and seen by all relevant parties. The tokenised bonds will become more accessible across borders and different investor classes, which will inevitably bring more traders, investors and global exposure to a previously illiquid market.
INDUSTRIA is an award-winning global consultancy and development firm that creates software solutions for large enterprises and ecosystems, with a focus on distributed ledger technology and smart legal contracts. Official partner of R3 and member of the Accord project. Our mission is to guide major enterprises through the digital transformation ensuring efficiency and growth.
INDUSTRIA delivers quality fintech, blockchain technology, and web solutions based on the time and materials model. To talk to us about making your idea a reality, contact us here or follow the links below.