Bridging traditional finance and digital assets with tokenisation

Investing in a fine art masterpiece was once a privilege reserved for the affluent.

This changed in 2021 with the tokenisation of Pablo Picasso’s Fillette au beret, the result of a partnership between digital asset specialist Sygnum and art fund manager Artemundi. Tokenisation involves the minting of digital tokens to represent fractional ownership of real-world assets, which are stored on a public blockchain or managed using another form of distributed ledger technology (DLT).

Priced at CHF 4 million (S$6.03 million) at the time of tokenisation, Fillette au beret was sold last year, yielding an estimated 20 per cent return to its over 60 token owners. 

According to Mr Gerald Goh, Sygnum’s co-founder and Singapore CEO, the tokenisation of the Picasso masterpiece has enabled a wider base of investors to gain access to the art market in the form of art security tokens. Beyond the art market, tokenisation holds broader potential.

“Tokenisation democratises investment opportunities by breaking down high-value assets into smaller, more affordable fractions,” he explained. “This not only lowers the barriers to entry for investors who might not, for instance, have the substantial capital to invest in an art piece, but also opens up investment options that were traditionally limited to institutional or accredited investors, such as private debt portfolios.”

Other promising tokenisation use cases include commodities, which allow for new methods of investment without physical storage; as well as government and corporate bonds, which benefit from enhanced transparency and reduced transaction costs.

ENHANCING THE LIQUIDITY OF REAL-WORLD ASSETS

Tokenisation typically involves three key parties: The issuer, a service provider such as Sygnum, and investors. The issuer, who owns the asset, works with the service provider to create digital tokens representing fractional ownership of the asset. The service provider ensures regulatory compliance and facilitates the issuance and distribution of these tokens through its platforms. Investors can then purchase the tokens, gaining partial ownership and the ability to trade them on secondary markets. 

Sygnum has since expanded its tokenisation efforts beyond artwork to include a diverse range of assets, including a wine collection, treasury reserves and private market funds. 

Its end-to-end solution comprises Desygnate, the primary market issuance platform where tokenisation is carried out; and SygnEx, a secondary market trading venue for asset tokens. By utilising Sygnum’s regulated services, companies can efficiently tokenise their assets, provide investors with innovative opportunities and raise capital without putting up equity.

According to Mr Max Stuedlein, head of Strategic Digital Asset Solutions at Sygnum, offering tokens instead of equity has several benefits for companies looking to raise capital.

“Unless you are undertaking a primary issuance on a public stock exchange, your potential investor base is often limited to institutional or accredited investors,” he noted. “In contrast, tokens can potentially be traded on crypto exchanges. This allows issuers to accumulate liquidity from a wider base of investors and leverage the blockchain for greater transparency and traceability.” 

Compared to a typical initial public offering process, raising funds via tokenisation is less expensive due to lower administrative and service-provider costs. Administrative overheads are reduced as smart contracts automate functions such as dividend distribution, voting rights and sale of tokens.

Tokenisation also allows for the cost-efficient enforcement and maintenance of know-your-client and anti-money-laundering policies through the embedding of rules into the token itself. 

WHAT TO KNOW BEFORE EMBARKING ON TOKENISATION

Before tokenising an asset, Sygnum undertakes a thorough assessment to ensure that the process will be beneficial for all parties involved. The first step involves assessing whether the asset will be an attractive investment for Sygnum’s clients, including evaluating its inherent liquidity. 

“While liquidity can be created for tokenised assets on secondary markets like crypto exchanges, there is still insufficient adoption and technological coherence that would make secondary markets a standalone solution,” said Mr Goh.

Regulatory compliance is another essential consideration. Sygnum helps ensure that the investment and its tokenisation is compliant in the relevant jurisdictions. “We investigate whether there are certain legal requirements that might hinder the tokenisation of the asset,” shared Mr Goh. “For instance, the traditionally non-digital land registers of real estate complicate potential tokenisation projects, hindering the realisation of their benefits.”

BRIDGING TRADITIONAL FINANCE AND THE DIGITAL ASSET ECONOMY

While tokenisation presents new liquidity opportunities for potential issuers, they must carefully consider the fundamental value proposition of their offerings, said Mr Stuedlein. 

“When raising larger amounts, it is helpful to have a professional advisor who can assist in shaping your investment story and fundraising structure, as well as connect you to investors who will be most receptive to it,” he said.

Since the groundbreaking tokenisation of Picasso’s Fillette au beret, tokenisation has found favour with a growing number of traditional and established players in financial services. Sygnum recently played a significant role in the tokenisation of Matter Labs’ treasury reserves and the creation of two new DLT-registered share classes in Hamilton Lane’s Global Private Asset Fund, expanding its application beyond art and collectibles.

The practice of putting traditional financial assets on-chain will intensify in frequency, predicted Mr Goh. “In Sygnum’s vision of future finance, serving as the tech or tokenisation provider for such projects will enable us to play the role of a trusted gateway between traditional finance and the digital asset economy,” he said. 

The information in this advertorial is for educational purposes only and does not constitute any form of financial or investment advice. Sygnum only serves institutional investors, accredited investors, corporate entities, banks and Distributed Ledger Technology Foundations.