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Tokenisation of Capital Market

Hello World — Wholesale CBDC, e-ID, Onboarding!


After involving in blockchain for 7 years, I think I’ve developped a strange synchronicity with the market. While I was almost finishing with this article, ECB announced that they are ready for the preparation phase for digital euro (retail CBDC) last week.

I felt it’s urgent to learn. In the past month, I’ve been studying over 1000 pages of documents from regulators, central banks, and market participants, also interviewed 2 platforms that tokenized private assets. It requires me to perceive blockchain, economic and finance knowledge as a whole. When it comes to digital world, the technical contents are impossible to avoid. I tried to extract and summarize the key points that may influence our understanding of future investment system. Hope it helps people to learn this subject in a more intuitive way.

Bitcoin was introduced in 2009 right after the sub-prime crises, since then, the new world was ready to update into its new infrastructure. Recently, tokenization of RWA (Real World Asset) has becoming a new hype. It uses distributed ledger technology (DLT) to fractionize ownership. These tokens can be representations of traditional tangible assets (such as real estate, commodities, artworks), financial assets (equities, bonds), etc. You may heard these noises in blockchain event: You can be the owner of part of a Rolex! Part of a Picasso painting! Part of vintage Porsche! However, while tokenising physical assets still face many obstacles, tokenising financial assets would be more crucial and realistic, and it will be eventually connected to the new fiat money system — CBDC.

I would analogise Tokenization as a christmas gift that is delivered by Santa. Once upon a time, Santa rode reindeer sleigh for 2 days (T+2) to deliever a teddy bear under your Christmas tree (settlement), even no wrapping paper for the gift. Then your parents will put it directly in your Christmas socks while you are sleeping. Nowadays, Santa bought a Tesla, so he can deliver the teddy bear directly it in your socks in the same day (T+0)! However, All the conditions of how you use the gift are written on a beautiful wrapping paper (tokenize) with Santa’s language (smart contract), he stipulates that you can only hug the bear in weekend (programmable). Your parents’s (financial intermediaries) responsibility is only to make socks (open wallet) and embroider your picture and name on the socks (KYC).

On the technical side, I would say that the main changes are the faster settlement process (DLT), programmable token (smart contract), and privacy designs (permissioned/permissionless blockchain).

On the financial side, understanding the main underlying assets is important. Fixed income is an instrument rather simple, transparent, and less volatile — common examples such as government and corporate bonds; However, Private assets is obviously more sophisticated, as the information is uaually more asymmetric compared to public market. Investors are supposed to have good sensitivity of the market, enough in-depth knowledge of a specific industry, understanding the due diligence documents, etc. Personally, I would not invest in a VC fund before speaking to the fund manager in person. Without a certain level of training, it could be challenging for general public makes proper investment decisions. For the moment, nearly all the toeknization asset platforms only accept accedited investors, even if the minimum ticket lowered down to $5000. The head of CAIA also expressed his concerns in his article: Democratization Without Education. Can we have Alpha and scalability at the same time?

This also alerts the Financial Advisor/CGP community to be better trained in blockchain and alternative investment field. In France, I think the education of these subject are far from sufficient. Moreover, the professionals should demand regulation to be more transparent with the underlying assets, individual investors should examine the quality and sutability of a financial instrument before giving in their personal information.

After all, fear and greed never fails financial market. Eden garden’s story never changed. With the veil of cryptography, things could be more wild. Be well prepared!

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October 2023 published on . All rights reserved.

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