It might seem counterintuitive, but liquidity is a key benefit for some tokenized securities issuances and a drawback for others. It depends on the asset class. That was one of the topics discussed by executives from BNY Mellon, BNP Paribas and others during a digital securities and funds panel at the Crypto Asset Conference this week.
Kurt Zeimers of BNP Paribas noted the benefits of DLT for fund distribution. Ireland and Luxembourg are the jurisdictions of choice for UCITS funds seeking distribution across Europe and worldwide. In contrast, German registered funds are only distributed in Germany. That’s likely to change with Germany’s recently enacted electronic securities act (eWpG) with the possibility of tokenizing fund shares. Now Germany’s so-called crypto securities can be registered on a DLT that is managed internationally.
BNY Mellon’s Benjamin Duve noted that, at a high level, there are two sets of benefits to tokenization. On the one hand, there are efficiencies and improved operating models, and on the “other side is reach, distribution, depending on the asset class there’s liquidity, if you talk about private asset or example”.
Private assets generally don’t currently have liquidity. So any improved reach through tokenization is a bonus. But that doesn’t apply to other asset classes where conventional securities have liquid markets.
As noted in another panel, the lack of secondary marketplaces is one of the key challenges that need to be addressed for tokenization to achieve traction. And something that Europe’s DLT Pilot Regime aims to address.
“Even if you have a buy and hold long term invested asset, you want to be able to trade out of those assets,” observed Duve. “That’s where the difficulty starts. Liquidity is the key.”
We noted that Union Investment bought the entire first EIB €100 million blockchain-based bond. But it only had a two year maturity, so buy and hold wasn’t very long term.
Private bank Hauck Aufhäuser Lampe recently managed the digital bond issuance for Siemens. Hauck’s Head of Digital Assets, Simon Seiter agreed with Duve that “there are instruments that don’t have access to liquidity pools. For them, it (tokenization) is perfect.” For something highly liquid like an ETF, he believes it’s impossible to do on blockchain. And debt instruments are “OKish”.
Addressing the digital security liquidity issue
However, there are solutions to the liquidity conundrum which the panel didn’t have time to discuss. One answer is for the issuing platform to remove the novel digital issuance feature for some market participants, enabling everyone to trade and settle in the way they normally do.
That’s done by linking digital securities depositories to conventional central securities depositories. That way, the entire market can provide liquidity for digital securities, addressing fragmentation. It’s something that the SIX Digital Exchange did for the UBS digital bond issuance, which at CHF 375 million ($410m) was by far the largest to date that was entirely a native digital issuance.
This is similar to how it works in conventional markets. In the Eurozone, there is multi-venue trading through linkages between the local CSDs that are members of each other. This allows the settlement to happen at the home CSD.
So while we wait for more mature digital securities secondary markets, just use the existing secondary markets. Yes, there’s some extra friction during the transition process. But that’s how we get from a to b.