DBS, an AA-/Aa1 rated bank in an AAA rated country, recently issued its First Tokenized Bond on a Digital Exchange.

If this doesn’t convince you on how bullish the prospects are for this industry, there’s a chance you just might be one of them grumpy boomers.

But wtf is tokenization? Does that even mean that it’s “real”? Or does it exist in a magical faraway land called blockchain? How do you even trade it?

All these and more in this episode!

1. You can tokenize just about anything

Let’s first address the elephant in the room. What is tokenization? Simply put, tokenization is digitally converting and storing an asset onto a blockchain.

Remember how you used to hold onto to physical certificates of stocks and bonds? And now they are all stored as numbers on the databases of custodial exchanges and brokers? Congrats! You are every bit as old as I imagined.

Instead of storing assets on private databases (of organizations such as banks, custodies and trustees), they are now immutably stored and made accessible on a blockchain.

You can basically tokenize any asset that your beating heart desires. Traditional boomer assets from securities such as bonds, property or private equity, to “frivolous” zoomer pieces such as NBA collectibles, Digital art and Twitter Accounts.

This LeBron dunk sold for more than USD 200k (Source: NBA topshot)

One thing to keep in mind though, when you’re dabbling in such digital assets – What are you really trading?

Is it an intangible right such as a patent or royalty? Or is it fungible like a security, currency or commodity? In which case it should probably be regulated as such. The DBS tokenized bond is being traded on the DBS Digital Exchange (DDEX) and is currently open only to institutions and Accredited Investors, not the common pleb like you and me.

Some of these digital assets might also be a lil’ more abstract and tricky to define/value, such as an scarce art piece, collectible or a social value. These are more commonly known as NFTs (non-fungible tokens).

2. Faster, better, cheaper

Financial assets are perfect for tokenization. The industry has long been dominated by the incumbents. With huge barriers to entry placed by regulators on organizations such as banks, insurance or payment companies, these behemoths have become slow, bloated and ripe for disruption.

Enter tokenization.

While fintech aims to solve some of these issues (P2P lending, micro-financing, payment processors/systems etc), blockchain and financial tokenization brings the game to a whole new level.

Fractional Ownership encourages adoption

Without the need for a bank or even a securities account, a minimum wage worker in Nicaragua can now trade half a share of TSLA if he wants to.

Millennials who can buy into fractionalized property will no longer be priced out of rising property prices. Asset ownership will no longer be as restrictive as it used to be, and tokenization fixes this.

Anyone can now own a fraction of a TSLA share

Increased liquidity and utility leads to flexibility

Certain investments are just not liquid enough to be viable unless you are drowning in excess cash – such as private equity and property.

With tokenized versions of these assets, you can now free up capital when you need it. Also, since digital assets are not bounded by exchange hours, you can basically trade in any time zone (read: no more eye bags from staying up all night trading US hours).

Greater efficiency, transparency, and lower cost

Sick of borrowing at the bank’s “default board rate” of 3% while the billionaire next door gets that sweet sub-1%? Me too. Because transactions all occur on the blockchain, almost anyone is able to access the historical records of these trades.

And also, because instantaneous confirmations.

This greatly reduces lag time and lowers the processing cost/fees for trades (T+3 settlement anyone?). The entire process becomes less cumbersome and the automation encourages true value creation.

3. Tokenized assets include Synthetic assets

Tokenized assets straddle both the crypto and fiat world.

Digital securities (ie. tokenized assets) are issued in the fiat world via blockchain from centralized organizations such as banks like DBS.

On the other hand, NFTs (also tokenized assets) which behave less like traditional financial assets, are more relevant to the crypto world. Here they are actively traded with cryptocurrencies such as Ether or Bitcoin.

There is a whole different rabbit hole of Synthetic assets, which exists in the DeFi crypto world. Think of these as tokenized derivatives which mimic the performance of real world financial assets. If they sound like total return swaps, that’s because they are. These are issued via different DeFi protocols and trade 24/7, even if the exchange that the original asset trades on, is closed (eg. Apple share on NASDAQ).

They function on liquidity pools, and rely on liquidity miners/providers. So instead of relying only on a single counterparty for a total return swap in the fiat world, you now have a pool of liquidity providers you can trade through.

Different types of Tokenized Assets

Trade FX, Equities and Commodities with Synthetix Protocol

Trade Funds and Equities with Mirror Protocol

4. Tokenization requires expertise (a crap ton of it)

If tokenized assets have been issued in the fiat world, there’s a high chance that they are already being regulated. Right now the focus is on bridging that gap between the TradFi world (with an intermediary) vs a purely Tokenized/DeFi world without.

Obviously the technological side of things need to be airtight. There’s no reneging of deals when things are governed by a smart contract (read: fat fingers will be punished!). Buyers and sellers will have increased responsibilities and the framework needs to be flexible enough to evolve, yet strong enough to regulate (and here you thought LIBOR migration was bad!).

Some positions off the top of my head which might be in demand:

  • AML, compliance, tax
  • Financial governance
  • Technological integrations
  • Cyber security

The way I see it, the crypto and blockchain scene right now is a black hole sucking in massive amounts of talent and alpha, and increasingly I see more and more people heading towards the promised land.

5. Gradually, then suddenly

You could think of tokenized assets as a different format of an existing asset. But that’s just like using your Lamborghini Aventador to do grocery shopping.

Banks need to do their part to keep up, or risk being reduced to an increasingly commoditized function. But if they embrace the technology with grace, they might still be able to cement pockets of value in an increasingly complex and customized world, and stay relevant to the zoomers, who apparently are not the easiest of customers.

We expect asset tokenisation to increasingly become more mainstream as more of our clients start to embrace security token issuance as part of their capital fund raising exercise which we believe will boost Singapore’s ambitions to be a digital asset hub in Asia.

– Eng-Kwok Seat Moey, DBS Head of Capital Markets

A wise guy once said “We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.” And I tend to agree – barriers to businesses are being broken down everyday and the only way to stay relevant is to embrace it.

What has been your experience with digital assets so far?

P.S. Nothing in this post is to be considered legal or financial advice. Everything here is meant for information purposes, and should not be relied on for investment decisions.

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