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March 4, 2024

Monday Morning Memo: Quo Vadis Tokenized Securities

by Detlef Glow.

After attending the “FUTURE DAY—Day of Crypto Assets, Tokenized Securities, ETF Robo Advisors and Wealth Tech” of the XENIX ETF Days 2024 in Berlin, it became quite clear to me that the usage of distributed ledger technologies (DLT)—the technology underneath blockchains—is still in its infancy. The reason for this assumption is the fact that there have been only a limited number of securities issued as digital securities so far. That said, it is remarkable that one major German company has issued its first bond as digitized security, which might be seen as a lighthouse project which others may follow.

In addition, it also became clear from the presentations/panel discussions that the European fund industry has so far only launched a very limited number of tokenized funds/fund share classes despite the fact that there has been a lot of talk about tokenized products after the introduction of the DLT pilot regime and the MiCA (Markets in Crypto Assets) regulation. That said, some speakers pointed out that we are still in a very early stage and that we will see a lot more actions from asset managers in the near future. It was also pointed out that asset managers and other issuers are in general not reluctant of issuing tokenized funds, but currently do so rather to test the impact of tokenized products on their systems and internal processes.

This may mean that we will witness more of these “test launches” in the future, since tokenization is seen as a tool to increase the efficiency of the back office processes in the asset management industry and shall help to shorten settlement times. This is especially important since it is expected that Europe will follow the U.S. and shorten the settlement cycle from T+2 to T+1. That said, some market observers expect that Europe may make a bold move by shortening the settlement cycle to T+0. Such a move would not be possible without the usage of a completely digitized process chain.

Another topic that was discussed was the impact of a trustworthy stablecoin or a digitized euro (CBDC) issued by the European Central Bank (ECB), since this could be a trigger for the acceptance of tokenized securities by all kind of investors since it would allow investors to buy and sell digital assets ramp fiat money on or off the blockchain.

With regard to the above it can be concluded that the digitalization of asset management is still in an early stage, but we may see a wider adoption of tokenized securities in the near future as all stakeholders in the asset management ecosystem want to take profit from the advantages offered by tokenized securities. In this regard it is also clear that it will still take some more time before the blockchain technology will become the new market standard. Not to talk about a common market standard, since the asset management and their service providers are currently using a high number of different blockchains which are not able to interact with each other without the usage of “bridging technologies.” In addition, a common market standard would be needed to gather the highest possible liquidity for the trading of the respective tokenized securities.


The views expressed are the views of the author and not necessarily those of LSEG.


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