This article first appeared in Forum, The Edge Malaysia Weekly on July 15, 2024 - July 21, 2024

In today’s complex financial landscape, digitalisation is more relevant than ever. Financial institutions are always looking to optimise operations while cutting costs, and with the advent of blockchain technology, tokenisation holds the possibility of delivering value by addressing some common pain points in capital markets.

Recently, governments, private institutions and financial organisations around the globe have been busy collaborating on various projects that leverage the powerful capabilities of blockchain technology. Asset tokenisation refers to the representation of physical or financial assets, or any rights associated with these assets, in the form of a digital token on a blockchain.

Once an asset is digitally represented by a token, it can be traded quickly, safely and cost-effectively on public or private markets. Blockchain technology engenders a market for assets that could not be traded easily by fractionalising “lumpy” assets into digital parts that can then be traded, creating a wider base of investors who can partake in smaller investment sums.

As such, what was only possible for institutional investors in the past can now be made available to a wider array of investors in a cost-efficient, transparent and safe manner. What’s more, certain actions can occur automatically without human intervention; for example, corporate actions can take place when certain triggers are met since a smart contract can be embedded into the token.

Asset tokenisation can fundamentally change the funding and operational model for various industries, particularly the capital market. It presents a novel method to support real economy actors in optimising their assets, both financial and non-financial, in a different manner. What might have been a non-bankable real-world asset may now find its way into the financial ecosystem.

For instance, Japanese real estate firm Kenedix issued a digital security backed by a hotel in Sapporo City that uses the MUFG’s Progmat blockchain platform. This digital security comes with a utility token that can only be exchanged for souvenirs on-site at the hotel, thereby encouraging the owners of these tokens to visit and use the hotel.

In a similar way, land value in Malaysia that has not been fully operationalised or “monetised” by owners could potentially be unlocked via tokenisation. The land can be tokenised, registered on a blockchain, and access or user rights can be given or “sold” to other economic actors to utilise the land without changing the underlying ownership rights.

Another example with potentially broad application is from the Technology Innovation Institute (TII), an arm of Abu Dhabi’s Advanced Technology Research Council (ATRC). TII recently announced the tokenisation of its carbon-trading platform to support the trading of carbon tokens associated with green projects.

With our reliance on oil and fossil fuels while simultaneously emerging as a significant regional data centre, Malaysia could similarly think of novel ways to unlock the value of these assets to finance its path towards a carbon-free future via tokenisation. In the past, syndicated loans or raising capital via the equity or bond markets have typically been the usual financing route.

But with the advent of blockchain technology, these assets, or revenue streams from these assets, can be digitally represented as a token, registered on a blockchain, whether private or public, to fund green projects listed on the stock exchange or a digital exchange. In effect, this can help Malaysia offset the carbon emissions generated by these industries.

Malaysia is not unfamiliar with tokenisation. In October 2023, the nation listed its first digital sukuk led by Fusang Exchange via the Labuan International Business and Financial Centre. The structure essentially wraps the underlying sukuk into a digital format, opening another pathway for investors to access shariah-compliant, high-quality liquid assets.

Despite recent strides made by private players and governments in capitalising on blockchain technology, both locally and globally, there are key legal concerns that require attention. Specifically, appropriate regulatory treatment should be formulated for this asset class to take its rightful place in the financial system.

At present, blockchain projects that fall outside the remit of existing securities law or projects that use crypto tokens can encounter significant regulatory hurdles as governments react differently to the seamless cross-border capability of blockchain technology. Some level of harmonisation of tokenisation rules and practices is needed to develop digital tokens into a safe asset class.

Our neighbour, Thailand, for example, has taken significant steps to regulate digital assets and support the growth of tokenisation. The Emergency Decree on Digital Asset Businesses, introduced in 2018, provides a regulatory framework for offering digital tokens and operating digital asset businesses in the country.

Meanwhile, Singapore is working towards the legal and regulatory treatment of tokenised investment funds related to Project Guardian pilots that are close to commercialisation. Japan has implemented legal amendments indicating how digital tokens are to be regulated, with clear guidelines to adopt when promoting security tokens and the type of assets being distributed.

Ultimately, for asset tokenisation to take its rightful place in capital markets, clarity and guidance from regulators as well as a clear taxonomy are critical for legal purposes. Providing guidelines for token classification and determining implications under property law, contract law, licensing requirements and tax law are essential.

With the many projects being formulated on a public blockchain, these global or multi-jurisdictional crypto projects are coming to the fore. The establishment of international standards in areas such as anti-money laundering and countering the financing of terrorism laws, accounting and taxation is necessary to promote consistency and facilitate cross-border transactions.

Tokenisation is gaining traction because there is recognition that the adoption of blockchain technology can support more efficient capital formation and collateral solutions, not to mention the operational efficiencies that can ensue. Malaysia can play a role in promoting a safe space for tokenised projects to create more liquidity and product variety for its capital market.

In conclusion, tokenisation can potentially bring significant benefits to augmenting traditional funding models. It opens new opportunities for the securitisation of non-bankable real-world assets. Real estate, environmental sustainability and agriculture are just a few of the industries that potentially stand to gain from tokenisation as legal and regulatory frameworks improve.

Chia Su Yen heads the Asia Crypto Alliance and is an expert contributor for the Institute for Capital Market Research Malaysia’s (ICMR) research collaboration network. She was previously alternate CEO and head of Asia government affairs for Euroclear Bank, Hong Kong, and spent most of her professional career in the banking industry working with JP Morgan Chase in New York, Barclays Bank and Credit Suisse NA in Singapore.

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