Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: Ladies and gentlemen, we will now venture into the world of tokenization.
Speaker: We will discuss this exciting topic with Abir Al-Sadr,
Speaker: Director, Capital Market Supervision, Capital Market Directorate, Central Bank of Bahrain.
Speaker: Kara Kennedy, Executive Director, Global Custody Product Management, JP Morgan.
Speaker: Peter Liu, General Counsel, Virtual Asset Regulatory Authority, or VARA, and our moderator, Uzra Hussain, Head of Innovation and MENA Digital Lead, HSBC.
Speaker: Hi everybody, and welcome to our discussion on tokenization.
Speaker: Is it the new asset manufacturing factory?
Speaker: In 2022,
Speaker: investors are still eager to be educated and participate in safer digital markets, and traditional financial players are moving in to capitalize on this technology to further explore tokenization.
Speaker: Abir, let's start with you.
Speaker: A clear and comprehensive regulatory framework is necessary to create a stable industry and reduce uncertainty for market players.
Speaker: so that they're willing to invest, innovate and explore new markets.
Speaker: Bahrain has been an early adopter of regulations on digital asset.
Speaker: Can you tell us more about what CBB is doing to enable Bahrain as a fast emerging digital asset hub?
Speaker: Initially, we started with payment tokens and then extended it to other different types of crypto assets, including asset tokens, utility tokens, hybrid tokens and NFTs.
Speaker: In addition to that, we recently issued regulations for the issuance of digital tokens.
Speaker: We have planned to establish a regulatory framework for the decentralized finance, the DeFi, as well as staking and other innovative products in the DLT ecosystem.
Speaker: Another aspect that we are working on is the participation of institutional investors in the crypto market.
Speaker: We believe that if the institutional investors participated, this will add value to the overall market.
Speaker: and it may help also in increasing liquidity and reducing the volatility in the market.
Speaker: And our regulations impose an adequate level of obligations on the crypto asset licensees to ensure that investors are appropriately protected, as well as licensees adhere to the AML-CFT requirements.
Speaker: which are in line with FATF's recommendation.
Speaker: That brings me to you, Peter.
Speaker: So the UAE is vying with other crypto friendly countries, you know, to attract large investments and become a global crypto hub.
Speaker: And for instance, WARA has recently released the regulations related to virtual assets and related services.
Speaker: Tell me, Peter, how is this new regulation going to help in the promotion of the Emirate of Dubai as a regional and a global hub for virtual assets?
Speaker: Sure.
Speaker: Thanks, Ustrah.
Speaker: We spent a long time thinking about the issues that the crypto industry has brought about, particularly in the last 12 months.
Speaker: And we've designed something that focuses on a couple of themes.
Speaker: Market stability, attending to financial crime, having transactions that are traceable, no obfuscation of ownership,
Speaker: all the things that lead to a healthy ecosystem where businesses can grow in a stable environment.
Speaker: So FATF recommendations fully adopted into our rules.
Speaker: We also focus on market conduct, consumer protection, understanding how
Speaker: crypto touches broad retail and how it touches institutional customers in a different way.
Speaker: The rules are written with a principle-based approach so that we become as much as possible future-proof and not technology-focused.
Speaker: And we hope actually that that sends the right message out for Dubai, that Dubai is business-friendly, but this is not going to be light-touch regulation.
Speaker: But coming back to
Speaker: the topic at hand, tokenization.
Speaker: We have one rulebook which focuses on issuance.
Speaker: Slightly differentiating our approach to Bahrain, we've not gone for a specific tokenization rulebook.
Speaker: It is an issuance rulebook.
Speaker: It's quite broad in terms of the requirements every issuer needs to adhere to.
Speaker: It focuses a lot on AML risk.
Speaker: It focuses also on the...
Speaker: investor disclosures, a white paper, needs to include.
Speaker: What we're hoping is that it is nimble enough, it's drafted really broadly, so that the breadth and wide scope of this rulebook is enough to capture all forms of tokenization.
Speaker: Thank you, thank you, Peter.
Speaker: So it's great to know that the regulators are hard at work, right?
Speaker: But let's zoom into the basics a little bit.
Speaker: So Cara, how would you define tokenization and what are the best use cases for it in your experience?
Speaker: From a tokenization perspective, I think it's generally understood that this is a representation of value on blockchain or distributed ledger technology.
Speaker: And in many cases, it refers to a token which represents an underlying asset.
Speaker: There are also the opportunities to issue digital securities or other types of digital assets natively on blockchain or distributed ledgers, which effectively means that there is no underlying asset.
Speaker: Those digital tokens are effectively a new form of asset that is being held and can only be accessed via those ledger systems.
Speaker: Each will have their own characteristics in terms of
Speaker: the terms and conditions and what that token entitles the holder to.
Speaker: Most of our clients, we are typically servicing them in respect of securities or associated cash transactions.
Speaker: And so for us, our focus has been around tokenized assets in those areas.
Speaker: We operate a number of different networks which serve as the baseline infrastructure for us to then develop applications to solve particular
Speaker: client use cases or pain points in the market.
Speaker: We also last year announced our first trade across our tokenized collateral network and that was using a tokenized money market fund that was then effected as a transfer, a title transfer between two counterparties
Speaker: in use of a collateral transaction.
Speaker: So that's certainly some of the key areas that we see developments and interest from our clients in this space.
Speaker: Thank you, thank you, Cara, for sharing that.
Speaker: I mean, tokenization is so much more than just the creation and issuance of the token.
Speaker: It's when you're able to embed the lifecycle of an asset within the token, that's when the beauty of this technology kind of comes out.
Speaker: And that brings me to you, Abir.
Speaker: What would you say are some of the opportunities and challenges of tokenization?
Speaker: Tokenization can bring a paradigm shift in how the capital raising activity has been conventionally undertaken by issuers of securities.
Speaker: And we believe that tokenization has the potential to transform the financial markets.
Speaker: It is actually a transformative technology that which can unlock a new economic value
Speaker: It can enhance financial inclusion and enable more seamless and efficient financial services.
Speaker: And I think the biggest advantage of tokenization is disintermediation, thereby lower the cost of capital raising for the issuers.
Speaker: And I believe if tokenization implemented with adequate safeguards, it shall make the whole process cheaper, faster and safer.
Speaker: And I believe also that the primary beneficiary of tokenization are the small enterprises or the startup companies.
Speaker: Because with tokenization, they will be able to have an alternative source of finance with a global pool of investors.
Speaker: Thank you, thank you.
Speaker: So, Sokara, given that promise of transformation and of course the risks that it poses, what does your future roadmap look like as an asset service provider?
Speaker: How does it impact that?
Speaker: Well, I think we're already seeing a demand from clients to understand how we can support them in navigating this space as it merges.
Speaker: From a
Speaker: from a global custody perspective, you know, the first thing to say is that when we look at our ability to engage on our clients' behalf to provide custody for digital assets, our starting point is that, you know, we will only accept the highest levels of asset safety that we would expect in traditional securities.
Speaker: So whilst we recognise that there may be a need to
Speaker: utilise new technology, new operating models in order to enable access to these assets.
Speaker: We will not compromise in terms of asset safety and we fully expect to be able to support our clients in terms of the end-to-end servicing of those assets in the same way that we do for traditional securities today.
Speaker: So from a roadmap perspective, we obviously, as you would expect, are engaged with the assets that exist on our Onix blockchain, our internal technology to be able to provide custody services to clients that seek to access those.
Speaker: But we also engage strategically with other
Speaker: platforms that are emerging, particularly those that are operated by regulated entities, to look at how we can also provide access to assets that reside on those networks.
Speaker: So I'm going to turn to our regulators here, right?
Speaker: So as a regulator, how do you strike that fine balance between inviting innovation to generate wealth versus the risks that these emerging technologies may pose?
Speaker: And I'll start with you, Abir first.
Speaker: For the CBB,
Speaker: The primary objective has always been to establish an orderly, fair and transparent market in the crypto assets.
Speaker: So to this end, we have laid in our regulation a lot of emphasis on investor protection, including specific rules on handling of client assets and client money.
Speaker: as well as custody rules and disclosure requirements.
Speaker: Further, we have specific rules for market conduct, including extensive requirements to address conflict of interest issues.
Speaker: In addition to the rulebook requirements, we actively supervise the crypto asset licensees.
Speaker: through periodic reporting, including rigorous prudential reporting requirements.
Speaker: And our endeavour is to provide to the investors adequate safeguards without inhibiting the adoption of innovation or technology.
Speaker: Exactly what we wanted to hear.
Speaker: Peter.
Speaker: Open dialogue is extremely important.
Speaker: Continuous engagement with the community,
Speaker: with the industry, with service providers.
Speaker: Ultimately, we go back to those themes of attending to financial crime risks, attending to investor protection.
Speaker: So as long as you recognize those touch points as your guiding principles, that allows you to build a framework that is
Speaker: suitable and encouraging enough for the startups.
Speaker: So we are working very hard at creating that framework post the rule books and then also getting an ecosystem that can bring support to these innovative ideas.
Speaker: I think that's the way we're going to approach the next phase of development.
Speaker: Great, great.
Speaker: So let's look into the future a little bit, right?
Speaker: I mean,
Speaker: So, Cara, where do you see things headed in the future for tokenization, especially in sort of the post-trade space?
Speaker: So, I think one of the challenges that we have here is that we're still at a very early stage of maturity in terms of the use of the technology for regulated asset types.
Speaker: We have seen, as you mentioned, a number of platforms emerge over the past year, including HSBC's Orion.
Speaker: There is a need to ensure that we are working towards greater interoperability to enable the scale and liquidity that will be necessary to make these new ecosystems successful.
Speaker: Thank you guys for listening.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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