The challenge of tokenising capital markets


The digitalisation of the financial sector is more relevant than ever. Tokenisation based on blockchain technologies is accelerating the transformation of our industry. This development has an impact on our sector, and Luxembourg has a role to play in securing its future.

Why tokenise?

Tokenisation can be defined as the process of converting an asset, financial or otherwise, on a Blockchain, and thus being able to benefit from its multiple advantages. Financial capital markets have developed rapidly in recent years. Fund units, bonds and illiquid assets are natural candidates for tokenisation. According to the World Economic Forum, we will be able to tokenise up to 10% of NBI by 2030. It is often said that all products can be tokenised, but it is important to keep in mind the purpose and added value that this can bring to the value chain and to stakeholders.

The major promise of tokenisation is efficiency, but it also makes certain investments more widely accessible. Like cryptocurrencies, assets can circulate on the Blockchain 24/7, and transactions are better monitored. This transparency is an opportunity for clients as well as for regulators and auditors. The settlement/delivery cycle of transactions can also be carried out almost instantaneously. Using Ethereum technology, transactions take just 15 minutes, compared with the two or even three days for regular processing. Smart contracts, directly encoded in the blockchain, can also automate events linked to the life of securities, such as coupons, dividends and even expiry dates. In terms of innovation, with tokenisation investments can be split, thereby generating more liquidity and attracting a class of investors previously not concerned. Real estate is a good example of split investing.

Together, automation and the use of a distributed and decentralised register make the technology more attractive but have an impact on current infrastructures.

Impacts on the value chain

Financial transactions follow a traditional life cycle, with the primary market for issuance, the secondary market for the transaction, post trade for settlement-delivery, and, lastly, custody. In a digital world, these four components of the value chain will likely be transformed.

Regarding the primary market, we expect the creation of digital platforms, by existing players such as Societe Generale with SG Forge, or by new players such as Tokeny in Luxembourg. These platforms will specialise by product or set of products and will be built on different protocols. This is also a fantastic opportunity to develop a new distribution channel and stand out in a 3.0 world.

In the secondary market, players and infrastructures will have to adapt both to these new asset classes and to their schedules, and above all to the way assets are transferred. This will require in-depth adaptations, but the investments made by the existing players suggest that we are already on the way. This is made evident by European regulations, with the pilot scheme already in place.

Regarding the post-trade market, we are banking on simplification, with the creation of new rules and, above all, upstream automation. Infrastructures and connections are bound to be impacted if the technology is adopted on a mass scale.

Lastly, the method for maintaining access to securities tokens or cryptocurrencies differs from the traditional custodian approach. Roles and responsibilities are different, and they will need to coexist for many years given the emergence of a range of players with different value propositions (tech companies vs. regulated crypto-custodian).

What about Luxembourg?

In view of these factors, the financial landscape in Luxembourg may be disrupted if the necessary actions are not taken. Our country’s strengths remain pragmatism and agility. These strengths have enabled Luxembourg to become the leading financial centre in Europe in investment funds as well as a pioneer in capital markets. With MiCA and the pilot scheme, European regulation is becoming a reality, and our country needs to stay one step ahead by rolling out the requisite resources in our strongest fields.

Throughout the entire value chain and for the country’s flagship products, including investment funds, collaboration between private sector players and new players must absolutely be developed to adopt technology in a pragmatic manner. Otherwise, innovation will become our competitors’ territory.

Luxembourg has all the necessary ingredients to position itself as a leading centre by 2030. It is up to the various players involved to work together effectively to maintain our leadership.

Article published in French in Paperjam.

Laurent Marochini,
Head of Innovation, Societe Generale Securities Services in Luxembourg