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Sibos 2022: Are fractionalised digital assets red herrings?

Sibos 2022: Are fractionalised digital assets red herrings?

Discussions around the recent digital asset boom and its acceleration despite the market for tokenised securities remaining nascent kicked off at Sibos 2022 in Amsterdam. Sitting on a panel, Yuval Rooz, CEO and co-founder of Digital Asset, highlighted that he believes that “fractionalisation is a red herring.”

Fractional digital assets are taken and locked into a smart contract, where they can be broken into fungible ERC-20 tokens of equal value. From there, a person can buy as many shares of a digital asset as they like. A major benefit is that an individual can have complete ownership of a unique item. For some assets, however, this has meant that prices – and associated costs - have skyrocketed.

Rooz continued to say that “fractionalisation is the idea that you can transact an asset that traditionally would have been worth a lot of money if you traded the whole thing. Now, you can break it into smaller components and people that don’t have a lot of money can get a piece of the asset.

“That’s a great thought process, but what stands behind it is the transaction fee and the cost of a chain of lawyers that are required to process this manually. Everything can be represented as an ERC-20 is a red herring because it’s about the complexity of the asset that matters. That’s why Robinhood’s fractionalised trading of US equities is very efficient. It’s cheap and you can do it quickly.”

Rosie Hampson, executive director, Goldman Sachs, added that fractionalisation is as much about mobility, as it is market access. Beyond digitising new types of assets, Hampson explored how the industry must also consider the impact and the opportunities for traditional services and how increased liquidity can be created for these products.

“Leveraging blockchain to represent an asset token can facilitate atomic swaps which creates secured intraday liquidity for the market and mobilises traditionally illiquid assets, which provides risk reduction due to the instantaneous nature. Fresh innovation is not just about opening up opportunities when it comes to a secondary market perspective. It’s also thinking about how these assets move in a more efficient and more effective manner.

The panel went on to discuss how the fundamental benefits of blockchain such as immutability and transparency can be utilised to enhance traditional and new assets in the way they move, the way they are structured and the way in which they are traded.

David Durouchoux, deputy CEO at Société Générale, mentioned that when considering blockchain, the sector must remember that the “fundamental characteristic of the technology is that it is disruptive.”

On this point, Jens Hachmeister, head of issuer services and new digital markets at Clearstream, called out that with this infrastructure, the private – or public permissions - must be understood. “This is the second priority. But the first thing to consider is: what is the change that is happening to market infrastructure and adding distributed tools into the central elements of what we have today? I believe that the next generation of digital market infrastructure needs to be inclusive – meaning it consists of existing legacy and decentralised elements.”

Before technology is used, educated is required and while there is an evident pull from the retail market, this enthusiasm needs to shift into the institutional market. One challenge that permeates this space is that “things tend to be more complex in the short term before they get easier again, as Hachmeister said.

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