Blockchain technology, or the system for recording transactions and tracking assets, is no longer just a buzz word. Today, we see its adoption across various industries, laying the foundation for a Web 3.0 future.
The opportunities for blockchain technology in finance are vast – and investors are keen to participate. During the first nine months of 2021 in the ASEAN region, FinTech investments in blockchain-related financial services reached US$31.5 million, illustrating the high level of interest investors have for the technology.
Building an inclusive ecosystem through asset tokenisation
The ubiquity of blockchain can be seen in a newly emerging class of FinTech products such as digital wallets, mobile payments, trading platforms and marketplaces. Through blockchain technology, traditional finance (TradFi) is being challenged by decentralised finance (DeFi) models.
However, DeFi comes with risks. The cryptocurrency space has been especially vulnerable to heists, hacks and misuse, like money laundering. In 2021, scammers took more than US$14 billion worth of crypto assets by exploiting various tactics including phishing for crypto wallet key information and other personal data, aggressively marketing crypto investment opportunities as part of a "pump and dump" scheme, and taking advantage of the anonymity that comes with using blockchain. With a lack of definitive legal and regulatory frameworks, coupled with law enforcement's relative unfamiliarity with blockchain, holding wrongdoers accountable can be challenging.
Nonetheless, these risks do not dampen the potential and advantages of applying blockchain technology in finance. The technology can increase inclusion by making financial instruments more accessible to institutions, small and medium enterprises (SMEs) and the general community. Recognising the potential in blockchain technology, UOB is determined to implement asset tokenisation efficiently. The Bank participated in the recently held Singapore Blockchain Week 2022 which emphasised Relevance, Regulation and Realisation, or the three Rs of unlocking assets through tokenisation.
UOB participated in the Singapore Blockchain Week 2022 which was held from 25 to 29 July. Photo: Blockchain Association Singapore
Understanding the relevance of tokenisation
A key component to the development of inclusive financial instruments is asset tokenisation, or the process of creating digital representation (“tokens”) of real-world assets. Tokens are pegged to assets, enabling access to securities, commodities and even real assets such as real estate.
Tokenisation’s relevance can be best understood from two points of view: the supply side and the demand side.
Relevance of tokenisation to institutions and SMEs
From the supply side, or the perspective of institutions and SMEs, tokenisation offers a new channel for fund-raising. There is particular interest in creating efficient and cost-effective fundraising options for capital markets and trade finance.
Capital markets
Institutions and SMEs can tokenise assets such as securities, bonds and commodities to accelerate and enhance access to capital. A digitalised approach reduces the number of intermediaries involved in the issuance process and, as such, is more cost- and time-efficient than traditional methods.
For example, UOB piloted a digital bond issuance on Marketnode's digital asset issuance and depository platform in June 2021, making it the first financial institution in Singapore to tokenise a capital security. Marketnode, an SGX-Temasek joint venture, taps on blockchain, smart contracts and tokenisation to digitise capital markets.
Trade finance
Blockchain solutions have long been promoted as an enabler to digitalisation of trade finance. Leveraging on blockchain’s unique ability to tokenise and digitise essential trade documents (e.g. Bills of Lading, Letter of Credit) that are today commonly routed through the banking network in a physical form, this can potentially be the conduit in which trade finance is finally more digitalised, immutable and efficient This is an important endeavour today as various supply chain disruptions have increased global trade finance gap amounting to US$1.7 trillion.
In 2021, the Bank partnered Infocomm Media Development Authority (IMDA) to pilot a cross-border digitalised trade finance transaction between Singapore and China using electronic bills of lading, which was driven by blockchain technology provided by TradeTrust. The results of the pilot demonstrated a reduction in the processing turnaround time (from a few days to less than an hour) and demonstrated the interoperability of TradeTrust for paperless workflows within the trade ecosystem. With the adoption of this blockchain-based exchange for trade documents, UOB can more easily complement the digital trade ecosystem with tokenised trade finance assets.
Relevance of tokenisation to prospective investors
From the demand side, or the perspective of prospective investors, tokenisation offers improved investment access.
Asset tokenisation is essentially creating a digitised version of an asset and breaking it apart into tokens, which enables the fractionalisation of bonds and other fixed income instruments into smaller amounts. Token buyers can therefore share in the ownership rights of the digitised asset, owning a fraction of it. This provides investment opportunities that can potentially less risky and more affordable for retail or first-time investors through diversification.
Speaking in a panel discussion at Singapore Blockchain Week 2022, Chua Chek Ping, Executive Director, Blockchain and Digital Assets, UOB, said, “In today’s market, an investor would have to put a minimum of $250,000 into a single bond investment. If it’s an SME high-yield bond, many investors shy away from it because there is no risk diversification. However, with blockchain where you can fractionalise a bond into $10,000, for example, investors would become more interested.”
Chua Chek Ping, Executive Director, Blockchain and Digital Assets, UOB, in a panel discussion at Singapore Blockchain Week 2022. Photo: Blockchain Association Singapore
During the panel discussion, the audience demonstrated a strong interest in tokenisation for real estate. Chek Ping said there is potential to tokenise real estate assets in the future, but its relevance to investors will be influenced by the existence of an already well-established real estate investment trust market.
However, as the regulations and opportunities in real estate continue to evolve, tokenisation could offer an additional option for investors to participate in real estate capital appreciation and rental income.
The role of regulation
The prospect of enhancing regulation has been key to the finance industry’s adoption of blockchain technology. In fact, between 2017 and 2021, more than 40 blockchain firms have entered Singapore’s financial services sector. The growing number of blockchain players reflects a wider exposure for investors, leading to a need to heighten regulation.
As the technology is new and has plenty of decentralised use cases , users may need some clarification regarding what the role of regulators or intermediaries in blockchain entails. According to Alan Lim, Head, FinTech Infrastructure Office, Monetary Authority of Singapore (MAS), “A good starting point [with blockchain] is [asking] what’s the driver and motivation of why we look at Web3 and DeFi. I think it's greater access and more efficient markets. I don’t think decentralisation is the goal in itself. I think it’s the benefits that accrue to the people.”
Regulators must tread a fine line by promoting innovation while simultaneously promoting accountability, transparency and financial stability in blockchain firms’ operations. MAS’s actions in this area include issuing guidelines that discourage cryptocurrency trading and payments for the general public; and developing a regulatory framework and data sharing platform to help prevent money laundering (ML) and terrorism financing (TF). The platform, named Collaborative Sharing of ML/TF Information and Cases (COSMIC), is co-created by MAS and six major commercial banks in Singapore, including UOB.
Institutional intermediaries like UOB can use blockchain technology to raise funds efficiently, increase access to assets that are otherwise difficult to invest in, maintain security and ensure that investors are qualified to participate.
However, what makes the role of regulation crucial in blockchain is the concept of trust. MAS has partnered the financial industry to launch Project Guardian, which explores the feasibility of asset tokenisation while managing risks to financial integrity and stability. The project introduces the concept of trust anchors, or independent financial institutions that help assess and verify entities interested in blockchain projects or tokenisation services. Trust anchors allow investors to know which counterparties have been screened and verified, leading to a more reliable and credible digital ecosystem.
Realising the value of tokenisation
Realising the value of tokenisation, however, requires more than having a regulatory framework. The ecosystem must have in place functionalities for:
- Building institutional-grade networks
- Evaluating tokenisation’s suitability for various use cases
- Establishing criteria for participant qualification
- Identifying infrastructure vulnerabilities
- Ensuring safe storage and custody of tokens
As such, industry-wide collaboration is the key that will ultimately unlock assets through tokenisation.
Conclusion
The world is heading towards a Web 3.0 future, giving rise to tokenised assets that offer more efficient options for capital raising, investment and liquidity. To truly unlock assets through tokenisation, however, the four Ts must exist:
- Technology (proper blockchain-based infrastructure)
- Transforming mindset (a culture of learning across enterprises and the community)
- Trust (layers of independent trust anchors)
- Talent (competent partners and operators)
With the goal of promoting Singapore’s capital markets infrastructure, UOB is at the forefront of creating progressive financial solutions and aims to provide clients with access to the benefits of asset tokenisation. Learn more about UOB’s services and opportunities in the digitalisation of the finance ecosystem.
