SINGAPORE - The tokenisation of assets from wine and bonds to real estate has shown potential, but more needs to be done to fuel its growth and widen the base of assets it can be applied to, say industry players.

The first step is to dispel a common misconception that an asset is made valuable just by the act of tokenising it, said Mr Stephen Richardson, the Asia-Pacific head and managing director of financial markets at Fireblocks. The company is a digital asset custody, transfer and settlement technology provider.

The focus has to be on what one is trying to improve when using the technology, he added.

He said: “It’s a cool experiment to tokenise an asset. But until you can prove that tokenising an asset at least provides the same level, if not higher, level of service and efficiency than what you already do, why would anyone invest millions of dollars in it?”

When an asset is tokenised, the overall process of issuing and trading in it is made more efficient and less prone to human error. The asset becomes digitised and is put on the blockchain, a type of distributed ledger. Physical paperwork is replaced with a smart contract.

The killer application of the technology is that it allows for fractionalisation, where the value of an asset can be split into smaller pieces and sold at a lower price to a wider pool of investors. This can enable assets such as fine art pieces to achieve liquidity.

To complement the efficiency that tokenised assets provide, Mr Richardson makes a case for money to be tokenised as well.

Stablecoins are a type of tokenised money – they are typically pegged to a fiat currency or exchange-traded commodities such as gold.

Mr Richardson said: “With tokenisation, I can move money and the asset instantaneously, and track where the asset is immediately. I can manage operational processes that usually require people to do through smart contracts more efficiently.

“Right now you’re getting efficiency on one end with the tokenised asset, but you’re not getting efficiency on the other end with the settlement.”

Investors still use fiat monies, such as the US dollar or euro, to buy tokenised assets on the blockchain.

The Monetary Authority of Singapore (MAS) recently said it intends to hold a public consultation on the legislative amendments for stablecoins in 2024.

Currently, payments firm StraitsX has a stablecoin pegged to the Singapore dollar. Other firms such as Circle Internet Singapore and DCS Card Centre are also considering issuing stablecoins.

Despite the benefits, only a small proportion of assets and securities in the world that are being issued and traded are tokenised.

One reason for this is that at this point, companies interested in doing so may be caught in the common issue when it comes to new technologies, where more adopters are required for the tech to become cheaper and for it to be easier to implement with more use cases on board.

For instance, companies may not have a cost-efficient platform allowing for seamless token issuance today, said Mr Rehan Ahmed, general manager and chief product officer of Marketnode. The company is a digital markets infrastructure operator that focuses on tokenising fixed income, funds and structured products.

“There needs to be a higher volume of tokenised assets in the market,” he added.

Based on internal estimates done at Marketnode, there were about 5,000 to 6,000 bonds issued in Asia between 2017 and 2023. However, in the same time period, only 37 bonds issued globally were in the tokenised format. The data shows the slow uptake of tokenisation, said Mr Ahmed.

A 2022 report from Boston Consulting Group and ADDX predicted that about US$16 trillion (S$21.8 trillion) worth of assets, most of which are illiquid, will be tokenised by 2030.

Antiques and fine art pieces are examples of illiquid assets, where their value cannot be easily or quickly converted into cash.

Things are moving at the regulator level. MAS recently published a report in June 2023 proposing a framework for designing open, interoperable networks for digital assets such as tokenised real-economy and financial assets.

In the same month, the regulator expanded its Project Guardian initiative with financial institutions in three areas – asset and wealth management, fixed income and foreign exchange – to test the potential of asset tokenisation across more financial asset classes.

Amid all the innovation and initiatives, it is important to ensure a strong, viable use case before proceeding to tokenise an asset, said Mr Willie Chang, chief operating officer of Alta.

He said: “If we’re going to put out tokenised securities representing assets like wine or art, it has to be something people are generally aware of, whether it’s a familiar brand or artist. It’s about giving people access to interesting products that they understand and feel is worth investing in.”

Alta is a digital securities exchange for assets across a range of categories including securities, luxury assets such as whisky and wine, and private equity.

Mr Chang added that Alta declines most project proposals involving real-estate offerings after careful evaluation, given the maturity and established real estate investment trust (Reit) market on the Singapore Exchange (SGX).

He said: “If a potential client comes to us and what they are offering is not better than what you get on the Reit market, then there is not much point.”

Given the nascent state of tokenised assets, it is inevitable that the industry has to go through a “growing cycle”, added Mr Chang.

“There’s no silver bullet or switch that you just turn on. It’s a long cycle of getting partners, investors, brokerages to come in and start trading. As you start to attract more people, better listings, and assets people want to tokenise and invest in, hopefully it grows.”