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Token economy: The big why for asset managers?

Posted by on 27 September 2022
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Asset managers are going through a rough year. Markets are difficult for everyone, across asset classes. However, some are silently grinning. While many asset managers became complacent by the growth of the past decade, the tide turned.

Those challenging themselves despite record earnings and particularly, those embracing blockchain technology while others brushed of Bitcoin, now have a head start into the token economy.

The big why? There are two of which we start with the easy one: tokenisation.

Tokens are the “smart” in smart securities. In the easiest form they are a digital tupperware, wrapping any asset in a standardised shell. A token is materially more secure, more scalable, faster transferrable, need except Bitcoin much less energy (!) and are a whole lot cheaper.

The earlier an asset manager started implementing it, the sooner the cost benefits kick in to get through the crises stronger.

If you think the cost argument does not hold, the Markets in Crypto Asset regulation (MiCA) in the European Union that comes into effect in January 2024 or the White House Statement from September 16th, 2022, on digital assets provide regulatory frameworks.

MiCA is easily described as the MiFID II for digital assets. It includes tokenized securities, e-money tokens, stable coins and simply qualifies all other tokens as utility tokens and asks Crypto Asset Service Providers to comply. Frankly, no asset manager in the European Union’s realm will be able to abide by the choice “to not do crypto”.

And while the EU taxonomy calls for many additional data points on sustainability, consumption and ratings for securities, that in legacy IT systems are usually hard or merely expensively to come by, a token can bear as many additional data points, update them dynamically and store them in an immutable, audit-trail producing – a strong plus for tokens again.

The payment leg of trading will also dramatically change. Automated, real-time payments are useful way beyond margin calls. The complexity of the settlement process, cross-border trades and the cost associated with each transaction will be the compelling cases to change to blockchain-based payments of fiat currencies.

Depending on the counterparty risk an asset manager is willing to take, the “tokenised Euro” of a large domestic bank will be just as fine as the official “digital Euro” of the European Central Bank.

Across the globe, the race is on. The e-yuan is already in testing mode since April 2020, outcompeting both Bitcoin and Ethereum in the cumulative number of transactions after 18 months already. The ECB has just announced the five companies it has selected for their pilot regime and the World Economic Forum regularly announces the many others who successfully launched pilot projects.

For back- and middle offices that means materially less reconciliation and follow-on costs across fund reporting, compliance, risk, controlling, audit and third-party due diligences.

Tokenisation as the early driver of blockchain lets asset managers start having wallets, nodes, knowledge when to use the Q blockchain (for international corporate law!), when Concordium (for identity!) and when Polygon (for ultra-scalability!). Internal functions will adjust their organisation handbooks, e.g., how to do a know-your-customer process with blockchain-based source of funds.

And now, the BIG why – the second part of it. The token economy.

It is the biggest opportunity of the next two decades. The token economy is bigger than the platform economy of the internet. Tokens can do more than homepages. Homepages were already better than paper.

Yet, the digital integrity of electronic files – which is the decisive feature of blockchain- will empower a machine-to-machine economy with unheard of productivity gains and opening up new business models on the long-tail were human-led economies have biological boundaries.

24/7/365 – no language barrier like with homepages, global standardisation without lengthy multilateral trade agreements, simply by the code, with smartphones and internet connectivity far more reaching than banks have ever achieved so far and 5G continuously expanding – the plethora of technological benefits will dwarf what great benefits we see by tokenisation alone (16 trillion USD by 2030 according to a study of the Boston Consulting Group, 2022).

The token economy is now at a stage where aol.com was. We have seen with DeFi and others, first promising steps. And among the daily new launched projects, we see not only “crypto” and gamifications that seem irrelevant for asset managers. We also see the Chain4Travel camino blockchain disrupt the travel industry.

The real economy will launch new token business models and eventually, a business model similar to Google will emerge. Searching the web was not needed prior. And that will happen with the token economy – an opportunity too big and too exciting to miss.

Asset managers will be using more tokens than emails today. And it will affect investing as such more profoundly than the emergence of electronic trading did. It will not simply be a technology, it changes the risk-return-liquidity balance for all assets.

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