In our previous blog, we explored what tokenisation is and the advantages it offers financial institutions (FIs). This blog will explore the key strategic considerations for FIs around tokenising assets, and the critical steps needed to execute a strategy effectively.
A growing prize demands the right strategy
There is a strong and growing appetite for tokenisation in financial services. A recent report by EY and UK Finance highlighted that tokenisation can play a vital role in helping make assets more accessible. In fact, it could be transformative, especially in unlocking previously illiquid assets, with predictions that tokenisation of liquid assets could grow to over $16 trillion – approximately 10% of global GDP – by 2030.
Tokenisation is seen as crucial in simplifying and streamlining operational processes for FIs as well as broader business and economic models, as it can enable real-time end-to-end settlements at minimum cost. However, it also gives rise to different types of risks that FIs must consider. This includes security/tech risks, regulatory and compliance risks, operational risks, legal risks, privacy risks, market liquidity risks and valuation and price volatility risks.
With peers and crypto-natives looking to refine their offerings over the coming months, setting the right tokenisation strategy is now critical.
Four steps to deliver the right strategy
As FIs look to develop the right strategy, they must examine the internal and external factors. There are four key steps to determine the best strategy and decide how best to execute:
1) Looking internally: building the case – Highlighting the benefits for tokenising assets, what it means for revenues and how to navigate the risks it brings
2) Looking externally: understanding the competitive landscape and ecosystem – Understanding where the opportunities exist
3) Defining a role and setting the strategy – Selecting where to play in the value chain, i.e., to provide end-to-end or targeted services
4) Developing a roadmap to business readiness – Identifying the journey to take once the strategy is agreed
1. Looking internally: building the case
Building the case involves defining what tokenisation offers in revenues, risks and operating models for the FI, and highlighting the capabilities needed to realise this. To build the case, FIs should undertake:
· Business case development – Investigating the strategic, financial and operational angle of tokenising the asset base of the company. Key questions to ask include which assets should be tokenised and who are the target clients?
· Tokenomics modelling – Determining the feasibility of tokenising an asset and the financial projections for that tokenised asset. A key question to ask is how will an ecosystem be orchestrated around a proposed tokenised asset, product or service? FIs will also need to understand the time to see a return, the risks involved and how those risks can be mitigated.
· Business model design – Identifying how the tokenised asset will be monetised, and considering how best to increase market share in the blockchain ecosystem.
· Target operating model design – Defining a target operating model based on asset classification specifics, and developing a business model design that is fit for purpose. The model design should also be aligned to the unique risk profile and characteristics of each firm.
2. Looking externally: understanding the competitive landscape
Understanding the external ecosystem helps to clarify where the opportunities lie, and identify the best infrastructure to build on. To develop the external ecosystem view, FI’s should explore:
· Ecosystem landscape - Investigating the customer journey around the token and ooutlining the capabilities required to provide a comprehensive offering. This needs to consider future threats and opportunities in the blockchain ecosystem.
· Competitive and collaborative landscape – Identifying competitors and potential partners, and deciding whether to partner, acquire and/or build capability as needed.
· Partner risk management – Conducting robust third-party due diligence to mitigate the unique risks of working with others on digital assets. This should involve a comprehensive understanding of legal and tax compliance requirements.
· Ecosystem design – Identifying the possible roles within the value chain by identifying opportunities to create synergies within the ecosystem and understanding where they can best add value. It is important to consider how publicly available (anonymous) trading data can be utilised to enhance services/products.
3. Defining a role and setting the strategy
Key to setting the right strategy is identifying the unique role an organisation can play across the tokenisation ecosystem. There are three broad areas across this value chain to consider:
1) Issuance: origination and structuring, and minting and distribution
2) Trading: secondary market trading, and clearing and settlement
3) Post-trading: safekeeping/custody, and asset servicing
Some FIs may wish to offer all of these through an end-to-end service, which requires significant internal resource and capabilities across technology, governance, risk, legal and assurance. Another option is to provide the same scope of service by partnering with a third party to white label some of those offerings. Other firms may feel they can’t compete with specialist, crypto-native providers or other FinTechs, and may only offer services that they can provide the best value for clients. This could mirror what we have seen around cryptocurrency, where incumbents were leapfrogged by crypto-natives who could deliver cutting-edge technology services quickly.
4. Developing a roadmap to business readiness
Once the role is defined and the strategy is set, organisations need to develop a roadmap for successful execution. The roadmap should include:
Pre-issuance – Identifying, verifying and valuating the asset(s) to be tokenised, and conducting an audit of this process. This should also include an inventory of asset features and lifecycle behaviour for programming. FIs should consider smart contract design and validation, fractionalisation and its impact on volumes and pricing, and the optimal method for building awareness and driving adoption of the token.
Issuance – Balancing token purpose and interoperability for use and exchange, and identifying the right issuance tech (such as EYOPsChain) and token security.
Governance and asset management – Implementing procedures and controls to govern the relationship between tokens and underlying assets. FIs must also consider token registry selection and traceability, setting key reporting metrics for decision-making.
- Verification (whitelisting), trading and settlement rules – Deciding on participation boundaries, including the initial distribution criteria. There needs to be market and stakeholder orchestration, including trading and settlement rules (public or private/central or decentralised). FIs should establish a market microstructure to determine token price quotes and increments, and decide between atomic (simultaneous and instant) or delayed settlements.
- Data Management – Referencing data sources for pricing computation and underlying asset performance.
Promotion and Launch – Identifying target investors and developing marketing and outreach strategy.
Conclusion
It is time for FIs to move towards tokenisation and digitisation of capital markets activities. To achieve that, taking a comprehensive internal and external view is essential, as is then deciding where on the value chain to compete. There is then the comprehensive task of building up capability, including the right risk and regulatory controls.
The good news is that FIs can leverage their core strengths - their client relationships and their understanding of the risk and the regulatory environment. Given the prize at stake, FIs need to develop the right tokenisation strategy, and quickly, to avoid being left behind.
The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organisation or its member firms.
Key contacts: Strategy & Change Pierre Pourquery, Eric W. and Emanuel Vila, Legal & Regulatory Monica Gogna and Christopher Woolard CBE, Technology Muneeb Shah, Risk & Control Mark Selvarajan Richards, CFA, Prateek Saha, FRM, and Rupal Thakrar, Assurance Amarjit Singh 💙 and Laeeq Shabbir and Digital Assets Insights and Assessment (EY DAIA) Mely SOMKHIT and Bronwen Bedford
