Tokenisation has the potential to enhance access and efficiency for existing, well-established traditional assets

"We really believe that tokenisation is just a technology layer, it's a new way of representing the same assets that people already trade every day

Tokenisation can enhance access and efficiency for existing, well-established traditional assets, according to Henry Chong, CEO of digital stock exchange Fusang.

"We really believe that tokenisation is just a technology layer, it's a new way of representing the same assets that people already trade every day,” Chong told the audience at AsianInvestor’s 13th Family Office Briefing in Hong Kong last Tuesday.

Drawing a parallel to the rise of exchange traded funds (ETFs), Chong positioned tokenisation as a vehicle to simplify access to familiar investments, rather than a means of creating new, exotic asset classes such as cryptocurrency.

“Blackrock became the world's biggest asset manager because of ETFs, but it's just a wrapper of things that people want to buy, and now you have tokenisation, another wrapper, effectively a way to give people access to the same things they already want,” he said.

Many blockchain enthusiasts focus on tokenising niche items – like whiskey or racehorses – but Chong strongly advocates applying the technology to large, established markets that suffer from inefficiencies.

“Asset classes that are ripe for tokenisation are asset classes that you can see obvious demand and supply, where people are already transacting at scale in the traditional route,” said Chong.

A prime example that Fusang has turned its attention to is Islamic finance and the sukuk market, a type of Sharia-compliant bond.

“In the Middle East, these sukuk bonds have annual issuances of around $600 billion, but remain largely institutional and rely on outdated OTC trading practices – and I mean literally pick up the phone and call a human broker,” said Chong, referring to the prevalence of over-the-counter trades.

He argues that in addition to democratising access to markets and streamlining trading processes, the true power of tokenisation lies in its ability to improve market structure without altering the legal nature of underlying assets.

"I don't think you should change the legal structure of products," Chong said. "The question is, by representing it with a token in a new digital way, how can you change up market structure?"

In the booming private credit market, where family offices are showing increasing interest, tokenisation could also play a role, according to Chong.

Investment processes are currently cumbersome and often require direct participation in loan agreements or investment through fund structures, he said.

"One of the listing sponsors that we have onboarded is an MAS licensed fintech platform,” Chong said, referring to Singapore’s central bank. “Their whole job is to go out and originate these private credit notes direct to SMEs. These are typically $10 million to $20 million tranche sizes, paying between 10 to12% with a one- to two-year duration."

"If you can start to represent these loans directly in digital format, allow them to be traded [on] market infrastructure that feels very similar to what we're used to in public equity markets, you can have individuals or brokers purchase these loans exactly how they would purchase and distribute typical listed equities," he posited.

The approach not only simplifies the investment process but also potentially enhances liquidity, achieving two key goals for wealth managers: alleviating fees for clients and keeping their identities private.

Meanwhile, family offices could gain easier access to private credit investments and potentially benefit from improved liquidity while maintaining compliance within a familiar market structure, he said.

For family offices considering tokenised assets, Chong emphasises the importance of focusing on the underlying asset rather than getting caught up in the technology.

He warns against buying tokens simply for the sake of being involved in blockchain technology.

"You definitely shouldn't be buying a token-based asset because it's a token. It's a terrible idea. The question is always, what is the underlying asset? What am I getting, and is there a direct legal link between me holding this token and owning the underlying asset?" said Chong.

He advocates for two approaches to tokenisation that maintain a clear legal link between the token and the underlying asset.

“The first is native tokenisation, where the token directly represents a share or bond certificate. The second is through depository receipts, similar to ADRs, where a token represents a claim on an underlying asset held by a custodian,” said Chong.

In his dealings with regulators, Chong has found them to be open to properly structured tokenisation projects.

"Not only do I think there are no particular regulatory barriers to doing a lot of these projects, in my experience, regulators are actually very, very encouraging because that's exactly what they want to see, and they view this technology, in many cases, as making their job easier," he said.