KOTA KINABALU: News about HSBC Malaysia closing some of its branches, when it was hopeful for a long time in the past for Bank Negara to approve opening of new branches in Malaysia, points to a future trend of phasing out trusted banking intermediaries to a decentralised blockchain banking system with asset tokenisation on the blockchain, which is expected to be an economic game changer.
With Standard Chartered Bank, HSBC used to be joint Hong Kong banknotes issuer due the colonial era prior to 1997.
“Moving money around even globally should be as easy and cost-effective as sending a text message or sharing a photo, no matter where you live, what you do, or how much you earn,” says Henri Arslanian, the key speaker at the recent World Islamic Economic Forum (WIEF) webinar, stressing that your digital wallet with blockchain accounting system technology will remain unaffected by any bank’s bankruptcy.
“More than 86 per cent of Central Banks worldwide are conducting research into Central Bank Digital Currencies (CBDC) issuance.”
Robust economic activity relies on capital. There have been instances where wealth, and hence capital, is created out of thin air, like when central banks keep printing more and more banknotes. Economists agree that this never ends well in inflation.
The global recession of the past showed that complex financial structures, when they are too far removed from tangible value, lead to systemic collapse. That is one reason why a token economy represents such a significant change.
“If you have money in your digital wallet, the bankruptcy of your bank does not worry you, as your money is in your digital wallet, there is no need for you to withdraw from the bank. You can pay or send money from your digital wallet, without using the bank or its facilities.”
This is in the advent of the rise of Central Bank Digital Currencies (CBDC) like the Digital Yuan pioneered by the Bank of China available on trial for use in the People’s Republic of China, keenly observed by other central banks globally since blockchain technology first disrupted capital markets in 2017.
Now it is possible to tokenise all kinds of assets, ranging from real estate and art to commodities or even virtual assets, such as securities.
Tokenising gold can reduce bureaucracy with holding, storing and transferring the asset. Investors are purchasing the rights to real physical gold, safeguarded in vaults yet at the same time easily accessible on the ledger. Due to the immutable nature of blockchain, there is no possibility to sell the same ownership certificate to multiple people.
Furthermore, the Covid-19 pandemic has accelerated non-cash payment preference globally to avoid handling cash or dealing with banks in person or electronically, and there is also a trend towards tokenisation since we are now also able to tokenise physical assets by using blockchain technology, we can add liquidity to segments that have been thus far underserved by capital.
With the financial ecosystem struggling to achieve interoperability within its fragmented borders, tokenised assets remove physical barriers and geographical or infrastructural limits.
“What is a CBCD? A CBDC is a digital form of central bank money that is issued by the central bank and is part of the monetary base of that economy. Some benefits of CBDC include curtailing black economy and tax evasion, combating money laundering as well as an alternative to existing payment systems. By embedding monetary policy in CBDC, there is better visibility of the impact of a country’s monetary policy.
“Cutting out the banks for transfer of funds will save billions as the average cost of cross-border remittances remains high. The global average fee of 7 per cent to send funds cross-border amounts to over US$550 billion in remittances sent each year by over 350 million migrants working around the world,” Arslanian revealed, on the potential of delivery of financial services without any intermediaries.
The process of tokenisation refers to issuing blockchain-based tokens that can be traded, stored and transferred in the digital world.
These tokens exist on the chain, act as a store of value and carry the rights of the assets they represent, while the real-world assets backed by these tokens continue to exist “off-chain.”
This concept isn’t new. A typical example of tokenisation is “air miles” programmes that can be converted into specific goods, services or flights. Digital tokens follow the same approach.
From traditional assets such as bonds, commodities, venture capital funds and real-estate to exotic assets such as artwork, race horses, sports teams and celebrities, companies across the world are using blockchain technology to achieve the vision of a tokenised world.
What is Asset Tokenisation? In today’s world, every asset is identity-centric. That means your house, your car, your salary and your stocks are all tied to your name.
When all these assets get tokenised, they can be broken into smaller ownership stakes. Real-world assets are moved onto a blockchain.
Then, tokens on the blockchain can be used to represent ownership or participation stake in these assets in the form of decentralised protocols. This allows tokens to be bought and sold on different exchanges. Ultimately, investors can invest in various illiquid assets such as real-estate due to lower minimum-investment requirements.
What are the benefits of Asset Tokenisation? From an asset owner’s perspective: Increased liquidity: Imagine Maria urgently needs RM10,000 and her apartment is valued at RM100,000. Maria’s apartment is tokenised into 20 security tokens, each worth RM5,000 or 5 percent of the apartment.
Now, she can easily sell two security tokens and get RM10,000 instead of tediously trying to sell the entire apartment, thereby making the apartment a more liquid asset.
Lower cost of paper-ownership: Presently, transferring the ownership of an asset involves lawyers and company secretaries to handle the paperwork of the transaction. Other than that, it requires a lot of time. Tokenising assets would automate a part of this process, saving both money and time.
From an investor’s perspective: Increased liquidity – Imagine Ali wants to invest in real-estate but he only has RM15,000. Since Maria just tokenised her apartment into 20 security tokens, Bob can now invest in real-estate.
In fact, Ali could diversify his portfolio by investing RM10,000 in Maria’s property, RM2,000 in an artwork, and RM3,000 in a fish rearing pond.
Thus, investors benefit from increased liquidity of illiquid and exotic assets.
In 2019, the global real estate market reached an incredible value of US$830 billion. Still, the sector also represents one of the most illiquid asset classes.
To obtain ownership of a real estate property, one has to buy an entire property and overcome high entry barriers, cumbersome transaction processes and substantial administration costs.
In the traditional financial world, investment barriers can be extremely high. Think about the amount of investment required to buy a real estate asset or a piece of art.
With tokenisation, we can lower the minimum investment threshold, allowing even small retail investors to diversify their portfolios and enter the previously exclusive markets that were only for large investors and high above their reach.
Asset ownership details are stored on the blockchain, the investor’s public-private key pair forms a digital signature on the blockchain, separating his blockchain identity from his real identity.
Hence, although transactions are visible on the distributed ledger, they cannot be traced back to the investor by an unauthorised party.
This is a huge step towards data security.
From traditional assets such as bonds, commodities, venture capital funds and real-estate to exotic assets such as artwork, race horses, companies across the world are using blockchain technology to achieve the vision of a tokenised world. Globally, several companies have been working on tokenising commercial and residential real estate.
As we are shifting towards a decentralised economy, new opportunities are rising. Digital business models are extending to physical goods and non-fungible assets that are represented by tokens on a blockchain, unlocking trillions of ringgit in illiquid assets and creating revenue streams.
The arrival of tokenisation will fundamentally change the way we invest and raise funds, says Henri Arslanian. -DE
