The 10x potential of tokenisation

Democratising investment opportunities

Rajeev Tummala, Director
Rachel Roch, Product Analyst
Xin Yi Tan, Product Analyst
Digital & Data, Securities
Services Singapore

Together we thrive
HSBC The 10x Potential of Tokenisation 2

Introduction  3

1What is asset tokenisation 4

2Putting it all up for grabs 6

3Challenges8

4Executing a shared vision of change 9

5Act now 10
 HSBC The 10x Potential of Tokenisation 3

Introduction
Tokenisation has the potential to unlock access to a wide range of assets for a new demographic of investors.

Tokenisation, powered by distributed ledger technology Granted, several other factors need to be in place for reality. In the region, higher internet penetration rates
(DLT), has the potential to accelerate progress on one of these populations to gain access to tokenised assets. and a growing middle class have helped drive financial
the most pressing challenges facing the world today – Many of the unbanked lack the necessary infrastructure; inclusion.5 Additionally, countries such as Thailand and
reducing global wealth disparities. not everyone has secure internet access, a customer the Philippines are implementing digital identification
credit profile or the required financial and digital literacy. for all their citizens,6 while India has also introduced
The total market size for global fixed income and equity The increase in smartphone usage and digital banking a centralised Know Your Client (KYC) repository with
was worth approximately US$178 trillion in 2019. in Southeast Asia, however, suggests that this part five national KYC Registration Agencies.7 These will be
Currently, 43.9% of global wealth is held by 0.9% of the of the population may well be on its way to such a trustworthy sources for customer credit profiling.
world’s population.1 More than half the global population
are at the bottom of this pyramid and collectively hold
a mere 1.8% of wealth. This group would benefit from Global Wealth1
47m
affordable access to a wider range of investable assets.
(0.9%)
In addition, a significant percentage of the population
> US$1m US$158.3 trn (43.9%)
has limited access to banking services, severely inhibiting
their ability to save and accumulate wealth. The world’s
US$100,000 to 1m 499 m US$140.2 trn (38.9%)
population stood at 7.8 billion in 2020,2 of which 3.46
billion were part of the labour force.3 However, 1.7 billion (9.8%)
adults remain unbanked.4 Tokenisation could open
up investment opportunities to large, under-banked
populations, supporting the United Nations Sustainable 1,661 m
US$10,000 to 100,000 US$55.7 trn (15.5%)
Development Goal of reducing inequality. (32.6%)

< US$10,000 2,883 m US$6.3 trn (1.8%)

(56.6%)

Wealth range Number of adults (percent of world adults) Total wealth (% of world)

1
Credit Suisse Global Wealth Report 2019, https://www.credit-suisse.com/media/assets/corporate/docs/about-us/research/publications/global-wealth-report-2019-en.pdf 2 https://www.worldometers.info/world-population/population-by-country/
3
https://data.worldbank.org/indicator/SL.TLF.TOTL.IN?view=chart 4 https://globalfindex.worldbank.org/sites/globalfindex/files/chapters/2017%20Findex%20full%20report_chapter2.pdf 5 https://www.cio.com/article/3393960/the-state-of-digital-banking-in-asean.html
6
https://www.cio.com/article/3331296/which-countries-are-implementing-digital-ids-in-se-asia.html#toc-4 7 https://testbed.ckycindia.in/ckyc/index.php
HSBC The 10x Potential of Tokenisation 4

1What is asset tokenisation?

Dematerialised /
physical assets today Fractionalisation Fraction (e.g., a third of original asset)

Assets are issued as tokens (programmable assets)

Tokenisation on the network based on smart contracts
Stocks & bonds
$

A smart contract is a self-executing contract with the

Smart contracts terms of the agreement written into lines of code
Real estate

Distributed ledger technology

Sustainable assets

Client wallets

Art The foundational

technology

Keys that sign

transactions
Physical assets
 HSBC The 10x Potential of Tokenisation 5

1What is asset tokenisation?

Rapid growth of tokenised assets.

The financial services industry is waking up to the Projected tokenised market volume until 2027 (in US$trn by asset class)10
transformative potential of DLT; it is estimated that
Listed equity Other equity Bonds Other financial assets
US$1.7 billion per annum is currently spent on DLT in Unlisted equity Investment funds Home equity Other tokenisable assets
financial services globally.8 The World Economic Forum
estimates that up to 10% of global GDP will be stored and 24

transacted via DLT by 2027 – tokenised markets could

X
potentially be worth as much as US$24 trillion by 2027.9

For DLT’s potential to be fully realised, financial market

participants and infrastructure providers need to 19
6
collaborate to galvanise change.

10-year 1
CAGR:+62% 15
1

5
11

1
1
7

4
9

2
1
0.5

2019 2020 2021 2022 2023 2024 2025 2026 2027

8
https://www.greenwich.com/equities/blockchain-adoption-capital-markets-2018 9
http://www3.weforum.org/docs/WEF_GAC15_Technological_Tipping_Points_report_2015.pdf 10
https://medium.com/finoa-banking/market-outlook-on-tokenized-assets-a-usd24trn-opportunity-9bac0c4dfefb
HSBC The 10x Potential of Tokenisation 6

2Putting it all up for grabs

Investment is usually seen as the privilege of the mass affluent,
and for good reason.

More than 84% of the world’s population will need to So how do we get there? Through DLT, a broad range
save for more than two years to be able to afford a share of assets can now be issued as tokens (programmable
in each of the top five market cap companies. Imagine assets) via smart contracts on a distributed ledger. Each
if anyone could buy 1/10th or 1/100th of a share in a token represents legal ownership of the underlying asset.
large cap company such as Apple or Amazon. This As tokens are highly divisible, each token can represent
fractionalisation would make it much more affordable a tiny fraction of any asset. This enables fractional
for a much larger part of the population to participate ownership, increasing accessibility to the securities
in the equity markets. Sounds impossible? Regulations market by allowing for a wider scope of eligible
permitting, affordability of investments might be possible investors due to pared down minimum investment
in the near future with the use of DLT. amounts.

Average monthly savings of each income class compared to the price of each top five market cap company share

2,475.00
Average Monthly Savings
or Share Price
(US$)
2,500

2,000

1,530.74
1,500
701.66

500 327.85
224.00 190.70
142.36
50.29 15.09
0
Amazon Alphabet High Apple Facebook Microsoft Upper Lower Low
income middle middle income
(savings per income income (savings per
month) (savings per (savings per month)
month) month)
Savings = Average GDP per capita in US$ (World Bank). Average Gross Savings Rate by region (World Bank).
Top 5 market cap companies refer to Microsoft, Amazon, Apple, Alphabet (Google) and Facebook.
Share price = 52wk high as of 4 May 2020 market close.
 HSBC The 10x Potential of Tokenisation 7

The average monthly savings (US$15) in low income Tokenisation also enables fractional ownership of illiquid
countries is sufficient to meet the estimated minimum or alternative assets that traditionally require a high capital
investment sum on many investment platforms.11 investment and hence have a limited investor base, such
The rising middle class and increasing popularity of as real estate, private securities and art. Investors can
investment applications also suggest that micro-investing hence benefit from a wider range of asset choices
is a viable option for those with lower disposable incomes. due to increased affordability, facilitating portfolio
By the end of 2018, 588 million users of Alipay in China diversification, while sellers would benefit from their
had already placed small amounts of money in its mutual assets having greater liquidity. In short, tokenisation
fund Tianhong Yu’e Bao.12 As of June 2019, its assets has the potential to give rise to a new demographic of
under management stood at US$150 billion.13 investors, creating increased accessibility and augmenting
the universe of investment options available.

Months of savings required to own a share in each of the top five market cap companies

Months
600
500
400
300
200
100
0
East Asia & Pacific

Europe & Central Asia

Latin America & Caribbean

Middle East & North Africa

North America

Sub-Saharan Africa

East Asia & Pacific

Europe & Central Asia

Latin America & Caribbean

Middle East & North Africa

North America

Sub-Saharan Africa

East Asia & Pacific

Europe & Central Asia

Latin America & Caribbean

Middle East & North Africa

North America

Sub-Saharan Africa

East Asia & Pacific

Europe & Central Asia

Latin America & Caribbean

Middle East & North Africa

North America

Sub-Saharan Africa
Financial inclusion
Advancing financial inclusion is an objective of the
Libra Project, a permissioned blockchain digital
currency project proposed by Facebook. The Libra
Association has extended its initial approach, and
now aims to offer single currency stablecoins in
High income Upper middle income Lower middle income Low income
addition to a multi-currency digital coin. Libra will be
Income classes a catalyst for tokenisation when it takes off.

11
https://money.cnn.com/2016/05/13/investing/how-to-start-investing/index.html
12
https://www.wsj.com/articles/more-than-a-third-of-china-is-now-invested-in-one-giant-mutual-fund-11553682785
13
https://www.scmp.com/business/banking-finance/article/3030678/ant-financials-yue-bao-shrinks-39-cent-loses-top-spot
 HSBC The 10x Potential of Tokenisation 8

3Challenges
Compliance Qualified custodians
Transactions involving tokenised assets would need to Custodian services in the tokenised securities
meet the same standards on ‘Know Your Customer’ (KYC) world are important in giving issuers and investors
and Anti Money Laundering (AML) as transactions carried confidence that their assets are managed securely.
out via traditional means. The speed, efficiency and The custodian’s role of safekeeping would be very
irreversibility of transactions on a distributed ledger different with tokenised assets. Ownership of tokenised
means that current highly manual operational controls assets is authenticated by means of a ‘private key’, which
and checks need to be replaced by automated prevents theft and unauthorised access to tokenised
compliance checks. Some companies have developed assets. (A private key is a piece of code that is known
specialised utilities to manage compliance checks. only to the owner, and it gives the owner the ability to
Examples include: Harbor,14 a compliance platform built to sign a transaction). The custodian’s role would be to
ensure tokenised securities comply with existing securities securely store and manage these keys. However, only
laws and Rate3 Network,15 a protocol that handles asset- a few qualified custodians are licensed to store tokens
tokenisation and identity management on Ethereum and on behalf of institutional investors. There is also a lack
Stellar blockchains. of standardisation in the requirements for digital asset
custody licenses across jurisdictions.

Regulatory environment A handful of companies have managed to secure

regulatory approval, including Coinbase, Gemini and
International regulatory alignment is essential for BitGo, which are regulated qualified custodians in the
the growth and development of tokenisation. There US. Major institutional players in the asset management
has been growing clarity in recent years as regulators and servicing space have also recently begun to offer
globally implement governance frameworks and policies custody solutions for the emerging tokenised economy. In
to regulate the emerging tokenised economy. November 2019, HSBC launched Digital Vault,
a custody blockchain platform to digitise the transaction
Regulators in several jurisdictions such as China, records of private placements. US$20 billion of private
Singapore, Switzerland and Hong Kong are exploring the placements assets (including equity, debt and real estate),
use of tokenised currency – central bank digital currency will be moved to the platform, allowing global custody
for use cases ranging from payments, settlement, to clients to now access their records in real-time. Fidelity
cross-border trade. China’s central bank is one of the most has launched the Fidelity Digital Asset Services platform
advanced, having rolled out a pilot of its digital currency in for securing, trading and supporting digital assets. Further
four cities. growth and development of digital asset custody
solutions as well as standardisation of licensing
requirements are critical to spur the growth of the
tokenised asset ecosystem.
14
https://harbor.com/
15
https://www.rate3.network/
 HSBC The 10x Potential of Tokenisation 9

4Executing a shared vision of change

The financial sector has become cognisant of the diverse
benefits tokenisation can bring, evidenced by increased
DLT activity. Engagement with a range of partners will Asia in focus
become ever more vital in discovering promising DLT
solutions. A case in point: HSBC Singapore, Cargill Asia is an ideal test bed for tokenisation, and is
and ING executed the world’s first live trade finance home to a population that would benefit from the
transaction on R3’s scalable blockchain platform, Corda, increased transparency and accessibility to the
in May 2018. In November 2019, HSBC Singapore securities market. Asia Pacific will be responsible
announced a partnership with SGX and Temasek (a for the overwhelming majority (90%) of the 2.4
sovereign wealth fund) to explore the issuance and billion new members of the middle class entering
servicing of fixed-income securities. the global economy. The bulk of that growth will
come from the developing markets of China, India
We believe DLT is at a tipping point. Within the next five and throughout South-East Asia.17 It is also home to
years, we expect DLT to achieve adoption at scale in the highest number of internet users,18 a population
the capital markets, and potentially replace core market that is comfortable with using cryptocurrencies19 and
infrastructure.16 This will change the shape of technology cashless payments,20 and a growing young, middle
spending – and in the process, exert growing influence class with economic influence.21 Yet on the other
over the way markets function, ultimately improving hand, the same region has witnessed rising income
inclusion for the under-banked. inequality22 – the Gini coefficient level for Asia is now
higher than the average for the rest of the world.23
Given the rapidly growing digital accessibility
(especially through increasing smartphone
ownership24) in this region, we believe that there is
immense potential in this market that DLT can help
to unlock.

16
https://www.gbm.hsbc.com/insights/securities-services/distributed-ledger-technology
17
https://www.weforum.org/agenda/2019/12/asia-economic-growth/
18
https://www.statista.com/statistics/265153/number-of-internet-users-in-the-asia-pacific-region/
19
https://www.statista.com/chart/18345/crypto-currency-adoption/
20
https://www.statista.com/chart/20618/cashless-payments-across-the-world/
21
https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/about-deloitte/Inside/lu-inside9-full.pdf
22
https://www.forbes.com/sites/ljkelly/2018/02/02/asias-wealth-gap-is-among-the-largest-in-the-world-what-can-leaders-do-to-fix-it/#422e593fa436
23
https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Sharing-the-Growth-Dividend-Analysis-of-Inequality-in-Asia-43767
24
https://www.thinkwithgoogle.com/intl/en-apac/tools-resources/research-studies/measuring-asias-mobile-transformation/
 HSBC The 10x Potential of Tokenisation 10

5Act now
We see tokenisation as the enabler to lower the barrier
of entry to investing for more than half of the world’s
population, by paring down the minimum investment
amounts required. DLT can also give investors access
to assets that traditionally would require high capital
investment (real estate, private securities, art), augmenting
the universe of investment options available. For this to
happen, compliance, regulatory and custody challenges
have to be addressed. It is encouraging that many
countries and organisations have taken steps to better
understand asset tokenisation and its significance, and
the potential is there for tokenisation to make buying and
holding assets ubiquitous, allowing for individuals at all
income levels to grow their wealth.

In the words of Astro Teller, Captain of Moonshots, Google

X: “It’s often easier to make something 10x better than
it is to make it 10% better.” DLT has arrived, propelling
the rise of tokenisation and thus enabling the market
to be 10x more efficient, 10x more inclusive, 10x more
resilient. To do this requires taking the path less trodden
and to undertake risk of failure for a larger payoff. The
past decade of banking focused on making the 10%
improvements; now is the time for the industry to
pull together to commit leadership and governance
to tackle challenges proactively and pursue the
opportunity to make the 10x difference.

Additional sources
BNY Mellon, Report: Digital Assets – Emerging Trends Around ICOs and STOs, May 2019
Deloitte, Report: Are token assets the securities of tomorrow? February 2019
Global equity and bond issuance: https://www.sifma.org/wp-content/uploads/2019/09/2019-
Capital-Markets-Fact-Book-SIFMA.pdf
Credit Suisse Global Wealth Report: https://www.credit-suisse.com/about-us/en/reports-research/
global-wealth-report.html
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