3. Which asset classes to digitise?
So which asset classes are best-suited to digitisation? As our experience of using DLT grows, our understanding of which asset classes are ready for tokenisation is evolving – and not in the direction that you read about in the headlines
Crypto first…
First and foremost, 2022 has been about crypto-currencies and the need to hold (and safe-keep) them on behalf of retail and wealth customers.
At the time of our market survey in May 2022, demand for digital assets from these segments had grown by up to 12% year-on-year as crypto-currencies quickly made their way into ETFs, wealth portfolios and margin accounts.
Whether this momentum has been sustained following the change in crypto market conditions is unclear, but there is little doubt that crypto custody has been a core, first step into DLT for the majority of brokers and custodians so far.
"In South Africa there are more than three million retail investors with with crypto exposures - and Kenya, Nigeria, Tanzania and South Africa all rank in the Top 20 of the crypto adoption index "
Hari Chaitanya, Standard Bank
A rich tapestry of business cases
As our journey into other asset classes continues, it is increasingly clear that there is no single asset class that stands above all others in its potential value from DLT. Given the multiple potential benefits of the technology and the myriad complexities of each asset class ecosystem, the range of business cases is vast.
In our 2022 research, we have tried to prioritise the strength of these business cases through a range of factors: the (forward-looking) appeal of DLT’s characteristics for each asset class; the market maturity (defined as the average number of market participants in each asset class ecosystem); and the returns that people have begun to see from using DLT in each asset class to date:
Taking all of these factors into account, mutual funds, private equities and securitised assets seem to present the most compelling case for tokenisation today – despite these two asset classes occupying comparatively fewer news headlines over the last year.
By contrast, the asset classes which have seen most industry attention to date (notably vanilla bonds and crypto) are neither the most appealing today, in terms of benefits, nor the most mature. There is clearly much more to DLT than what we’re seeing in the headlines.
There is no doubt also a timing-element to this prioritisation as well.
Given that 40% of DLT projects today are still bilateral (i.e. with only two ecosystem members), we are clearly still in the early stages of DLT’s growth in a production context.
Whilst funds and private securities may seem more mature today, other usage cases such as OTC derivatives and Commodities seem highly compelling but have yet to be proven at any degree of scale.
Where is the work going on today?
Whilst the largest part of DLT exploration (26% of total work today) centres on the end-to-end lifecycle benefits of the technology, there is still a great deal of exploration going on in specific areas of the trade process – most of all the post-trade space.
Of those working on DLT today, only 12% are focused on security issuance and 12% on trade execution – whereas a collective 23% are focusing on clearing and settlement and 22% on asset servicing, safekeeping and valuations.
This is entirely in line with much anecdotal evidence, which highlights that operational, post-trade efficiencies (including fails management, reconciliations and automation of manual tasks) are almost always the first pillar of DLT business cases today. Not only are they more easily quantified than the benefits of liquidity improvements or disintermediation, for example, they are also realisable today with fewer regulatory or external market dependencies. DLT is starting in the back office and then moving to the front.
