Partners from our global FinTech team flew in from Hong Kong, Vancouver, London and Dallas to join our New York team to attend Consensus and Blockchain week in NYC (13-15 May). Consensus is an annual global conference which brings together the world’s most innovative minds to explore and debate the future of blockchain and crypto. There were two topics which attracted considerable attention on which we have provided our key takeaways below.
Central bank digital currencies and fiat-backed stablecoins
We had many discussions with clients on the issuance of central bank digital currencies (CBDC) and fiat-backed stablecoins. The rise of cryptocurrencies and the increasing use of private electronic money are challenging the definition of money, the role of central banks and access to central bank money and the current state of the financial intermediation model. Central banks are under pressure to respond to the development of cryptocurrencies and to address any inefficiencies in existing payment systems. They have responded by actively evaluating the use of DLT to issue CBDCs. A wide range of models are under consideration by central banks and no clear way forward has yet emerged. What is clear is that there are concerns around the effects of a CBDC on interest rates and financial stability. In addition, central banks are evaluating the changes to financial intermediation caused by CBDCs and the implications for bank funding and liquidity. We wait to see how much of a policy road block this will be. Stablecoins were a hot topic at Consensus and came up in nearly every conversation we had with clients and industry participants, whether for use by crypto exchanges to reduce volatility or by wholesale banks as a settlement tool or even deposit product. We expect this interest to continue and other use cases to develop in 2019.
Tokenisation and security tokens
Another hot topic at Consensus was tokenisation and security tokens. This was demonstrated by the five or so back to back panel discussions on security tokens. Some say security token offerings are the new initial coin offerings as they provide a means of selling tokens within an established legal framework – others say they are, as a result, nothing new.
We had a lively discussion with a group of banks, market infrastructures and technology companies about what tokenisation really means, what are the real benefits and what the challenges are to widespread adoption. Some of the themes that prevailed were whether and where tokenisation achieves something better or different than a range of existing regimes such as crowd funding, pooled funds such as REITs and securitisation.
The idea of tokenisation is to create rights to an asset that are stored digitally in a distributed ledger and may even be capable of transfer using that technology. Proponents point to many benefits such as the ability for owners to use their assets to generate capital and for a wider demographic to be able to invest in a more diverse range of assets to which they might not otherwise have access and to create their own bespoke portfolios of assets. There is an idea that tokenisation will create liquidity in otherwise illiquid assets, such as shares in private companies. While we can see that a wider investor pool and more efficient mechanisms to transfer could make it easier to buy and sell tokens in a secondary market, there was healthy scepticism that tokenisation alone can create liquidity.
We identified a disparity in the ease and therefore current extent of adoption between retail and institutional use cases. While the global financial institutions are keen to evolve and are working on many projects globally, there are some potentially systemic risks with “pulling out one of the wires” from the existing ecosystem and market participants are too inter-connected for one organisation to change before others are ready to make the same investment. On the other hand, some entrepreneurs have started to provide platforms through which smaller and medium sized companies can raise capital more efficiently by issuing shares or debt in tokenised form. One of our guests was from an organisation which is also using the blockchain to manage shareholder registers, corporate actions and other corporate administration.
One of the key legal questions on tokenisation is how to link a token to an asset so that the buyer knows the token represents the asset. There will no doubt be different solutions for different types of asset but one of our guests demonstrated how this can work with consumer goods. He had a plastic model of Captain Kirk which had been signed by William Shatner and tagged with a unique code. This code is then hashed into the blockchain so that a token representing that specific model can be linked to that model and transfer of that token represents a transfer in ownership of the model.
With so many different ideas on the potential use cases for tokenisation and so many important participants in the market already at proof of concept state, if not beyond, we are sure to see much more about tokenisation in 2019.
Our global FinTech team will next be heading to the Hong Kong FinTech week followed by the Singapore FinTech Festival in November. Stop by and visit us at our booth in the expo centre to catch up on the latest hot topics.