The Asian Security Token Ecosystem — An Insider’s View.

Matthew Graham is the CEO of Sino Global Capital, a Beijing-based fintech advisory firm, and Managing Partner of Liquid Value, a consultancy focused on tokenizing traditional assets.

He is a China specialist with rich experience in the blockchain space. We are thankful to Matthew for sharing his Insights into the Asian Security Token Market with us.

Enjoy the Read.

Asia has gained a reputation as an innovation hub for blockchain projects. Asian regulators, especially in Singapore, are open to reviewing new technologies and creating favorable regulatory frameworks.

With the era of ICOs closing and the era of digitized assets/Security Tokens (ST) beginning, we are seeing fast growth in the Asian ST ecosystem, including investment in ST infrastructure from Asian VCs and the establishment of ST exchanges. However, Asia lags the West in terms of use cases and the creation of ST non-exchange infrastructure. The companies leading the tokenization charge are predominately based in the West.

In this article we’ll explore ST development in the Asian region and highlight some catalysts that could have a positive impact on the Asian ST ecosystem, as well as a potential “game changer.”

Exchanges and Alternative Trading Systems (ATS)

Most of the “headline grabbing” exchange news has been from the United States and Europe. For example, the tZero ATS went live, Coinbase announced their intentions to list digital assets, and Switzerland’s Six Digital exchange (SDX) is scheduled to go live later this year.

Asia has shown significant development as well. Global private capital platform CapBridge received approval from the Monetary Authority of Singapore (MAS) to operate a securities exchange in concert with ConsenSys. Additionally, the Singapore Stock Exchange (SGX) and Temasek’s subsidiary invested in iSTOX, a digital assets issuance and trading platform.

Australia is also joining the action as SEFtoken recently partnered with Securitize to create the world’s first digital covered warrant. This warrant gives holders the right to convert for equity shares of a licensed and regulated Australian Financial Market Infrastructure. This FMI is using the raised funds to develop needed digital asset trading infrastructure.

We believe that the development of exchanges versus ATS in the Asian region, the former of which is much more heavily regulated and trusted in markets, will speed adoption and use of ST as a fundraising model.

Regulation

The positive regulatory environment in Asia is the region’s biggest potential competitive advantage. While issuers in the U.S. struggle to understand opaque laws and regulators are slow to approve fundraising (for example, Reg A “mini IPO” exceptions have not been approved by the U.S. SEC), Asian regulators have begun to issue legal frameworks. For example, The Monetary Authority of Singapore updated its “Guide to Digital Token Offerings” and in early March Thailand’s National Legislative Assembly passed an amendment legalizing the issuance of tokenized securities.

China

China — the gorilla in the room. In September 2017, Chinese regulators banned ICOs and prohibited trading of cryptocurrencies. Chinese regulators have, to date, not offered clear guidance regarding Security Tokens. However, the Chinese government remains supportive of blockchain technology with President Xi calling blockchain a “breakthrough” technology and including blockchain in China’s 13th Five-Year Plan for the development of information technology. Additionally, a Chinese government affiliated entity even publishes rankings for blockchain projects on a monthly basis!

While STs may not be embraced by Mainland China regulators, they are being embraced by China focused venture capital and private equity funds. We believe that in the long-term, Chinese companies with huge demand for capital will begin to see the ST structure as a convenient vehicle for investment, leading to an embrace of the technology and establishment of well-defined regulatory policies.

Asian Catalysts

The Asian STO ecosystem lacks strong use cases — an example of the immense potential of tokenization. tZERO, Blockchain Capital, and the Hotel St. Regis Aspen, provided early use cases in the U.S. Neufund, an “end-to-end solution for securities tokenization and issuance” is among many use-cases Europe.

There are numerous reasons that Asia, thus far, has not produced an ST issuance on par with those in the West.

Clearer regulation will help, but the lack of Asian facing tokenization platforms like Securitize.io, Tokeny, or Polymath have been detrimental to the ecosystem. However, this has begun to change as Securitize recently signed new partners in Asia.

The largest issue is not the issuance of ST, but rather regulations involving investment in ST. The U.S. has a large capital base that can be accessed via numerous regulatory exceptions (A/D/CF), if issuers spend the money to be compliant, and work with a broker-dealer, then one jurisdiction (the U.S.) is likely enough for the entire fundraise.

In contrast, the Asian investor community is fragmented and spread across numerous jurisdictions, each with their own regulatory frameworks. For issuers, it often doesn’t make sense to choose Asia for capital partners as the regulations are simply too onerous.

The good news? We expect most Asian jurisdictions to have clear frameworks for ST in place by 2020 and welcome the development of regulatory “sandboxes” and regulatory exceptions.

The game changer?

Many of the promises of tokenization have yet to be unlocked. Liquidity is low as the first digitized asset ATS just went live and full-service exchanges are still under development. Regulatory and settlement benefits have not accrued as regulators have yet to fully understand and embrace how this technology can make their jobs easier.

However, the benefits of fractionalization are here now. Fractionalized investment (say in real estate) lowers the barriers to investment and widens the investor pool. In the West, there have been numerous successful examples of Commercial Real Estate (CRE) tokenization. In fact, Harvard Business School just released a case study about Fluidity, a startup that tokenized the refinancing of a New York condominium project.

Tokenization of real estate often creates a clear win-win in ways that tokenization of other assets may not. Issuers receive competitive rates and in some cases access to new capital pools and avoid reliance on bank loans. Investors receive access to investment assets that are traditionally reserved for only the most well capitalized investors.

In the process, middlemen are cut out.

There are numerous Asian focused startups in this space. We see the tokenization of real estate in Asia as being an important step in the wider acceptance of tokenizing assets as it represents a compelling use case. Real estate asset digitization could serve as a catalyst for the wider ecosystem in Asia.

The wrap

While Asia is not leading the ST revolution, positive regulatory and exchange developments point to a healthy ecosystem, one that will continue to grow. While anointing 2019 “the year of the security token” may be premature, we see developments in 2019 clearing the way for explosive growth in the ecosystem as regulatory clouds recede in late 2019. The smart money will get in early.

Thank you for the Insight!

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