Discussing blockchain and digital assets has become a staple at financial conferences, despite their mainly technical nature. Part of this reflects the growing interest in what is promised for these technologies, but increasingly companies are already using them. The companies who are still considering doing this are driving demand for more information.
Just such a report entitled “Digital Finance Readiness in Investment Institutions” highlighted interest in some 300 financial institutions in digital assets and was the jumping off point for a panel discussion at Tuesday’s Alfi conference sponsored by State Street and carried out by Oxford Economics.
The report found “absolute keen interest in following and tracking what’s going on with cryptocurrencies,” said Luke Brereton, global head of client acquisition for GlobaLink and State Street Digital. He said “over the last year or so, the emergence of tokenisation has really hit headlines for us and has been dominating. I’d say all of our conversations with clients.”
He noted that the companies tend to have dedicated teams including engineers “looking at how they’re going to use the technology to help the organisation, enter new business models.”
Digital assets infrastructure
Luxembourg has been working diligently at providing the legal and technical infrastructure necessary for tokenisation, including recently the 10th digital assets custodian, after there being zero a year ago, noted Nasir Zubairi of the Luxembourg House of Financial Technology, known also as Lhoft.
More and more firms are looking at tokenisation, especially in the area of alternative assets. Zubairi said he didn’t see how tokenisation could fix the liquidity issue. “But it seems an interesting notion to look at how tokenisation can provide access more easily to things like private equity and to real estate.”
Zubairi also pointed to the government’s blockchain three legislation and the fact that major issuers like the EIB have chosen to do them under Luxembourg law. “I think is going to become a core competitive advantage of Luxembourg.”
Portfolio diversification
Institutional investors are among the keenest on digital assets, often actively seeking exposure to them for portfolio diversification, said Dimitrij Gede, head of compliance at Deutsche Digital Assets GmbH. “It basically fits into a specific niche when it comes to portfolio diversification. Specifically, it increases the Sharpe ratio. So the returns are more the other way around, are less volatile basically.”
There have been significant inflows into crypto funds “over the financial crisis that we’re going through at the moment,” Brereton noted. He said the idea of people moving from deposits to investing in an asset class like Bitcoin is the sort of dynamic he “hadn’t really thought through before.”
Gede interjected that he wished this movement had been motivated by positive reasons, such a sound Bitcoin, rather than “being pushed by external forces into a safe haven or an asset that is considered more safe than a traditional bank bond,” he said, noting the irony.
Secondary market possibilities
While simply tokenising investments like money market funds may not seem all that exciting, Brereton noted, it’s the possibilities of the secondary market that he found more appealing. “We may well see this desire to actually, you know, in a way self-custody and determine where your deposits are held, and actually transfer them from being a cash deposit, a stable coin, or a tokenised money market fund or some other kind of bond fund and you can easily sort of move from one on to the other.”
However, outside of a limited space, there is a lack of infrastructure for a secondary market for certain kinds of investments, explained Zubairi, pointing to the recently issue EIB bonds which he said were “locked away” because “there is no secondary market, or at least no institutional grade secondary market.”
Knowing your business
Technology is an enabler, Brereton pointed out. “I think if we ever lose sight of that, then we’re in real trouble.” He pointed out that most technology is not complicated. “But you really do need to bring together the dynamics of what’s going on in the markets that you operate in, and then realise where and how you deploy this technology into your operations.”
Zubairi later pointed to what he almost suggested was the elephant in the room. “I do find it sometimes kind of strange that we’re sitting up here talking to a largely business audience, as happens way too often, in my opinion, about blockchain. I don’t remember ever attending a conference where somebody sits up here and talks about TCP/IP to business people, or how a text message goes from one phone to the other. These are all technologies we rely and trust every single day in financial services. I think we’ve gotten carried away with the whole blockchain DLT thing.”