Cracking The Code - The Evolution of Digital Assets to the mainstream

Executive Summary

In 1982, an American computer scientist and cryptographer, David Chaum, introduced the concept of ‘blockchain’, a new technology capable of delivering a wide array of benefits, including enhanced data integrity and cybersecurity, divisibility, and ultimately, programmability. Fast forward four decades and one application of blockchain that has stood out, in particular, is the birth of ‘digital assets’.While the digital asset ecosystem continues to evolve at a rapid speed, it can be broadly categorised into three key asset clusters: (1)cryptocurrencies (i.e. native and fiat-based cryptocurrencies); (2) security tokens (i.e.tokenised securities / digital securities); and (3)other digital assets (i.e. utility tokens and non fungible asset tokens).

While these new asset classes possess immense potential, many have been marred by controversy, especially in the case of cryptocurrencies. Their relatively nascent nature, together with an immature digital assets landscape, has seen bad actors exploit gaping regulatory arbitrage windows, resulting in a spate of fraudulent activity.

The spotlight being shone on the digital asset universe has, especially in more recent times, drawn the ire of regulators across the globe, who are increasingly clamping down on the space. While growing levels of regulatory scrutiny is narrowing the regulatory arbitrage window, it is also legitimising certain forms of digital assets; chief amongst them, security tokens.

The advent of the security token has brought about with it several advantages, including: (1)greater transparency; (2) dematerialisation; (3)enhanced asset liquidity and capital accessibility; and (4) disintermediation. While adoption levels have been somewhat muted in recent years, we believe security tokens will open the door to a legitimate, well-regulated pathway for institutional investors to participate in the digital asset ecosystem, especially given their restrictive investment mandates and over arching fiduciary duties.

Looking ahead, we expect a growing number of unregulated players to become licensed entities and offer security token products that institutions can comfortably embrace.Recognising the opportunities on offer from security tokens, a number of: (1) traditional exchanges; (2) cryptocurrency exchanges; and(3) digital asset broker / dealers have embarked on a quest to transform into ‘security token exchanges’, albeit at different speeds and with varying degrees of focus. In response, the ecosystem surrounding these exchanges is also set to evolve, with the ongoing transition from traditional securities to security tokens expected to create clear winners and losers among existing capital market participants.

With an estimated USD 4.1 trillion in listed security token issuance volumes (and USD162.7 trillion in security token trading volumes)up for grabs by 2030, we see an immense opportunity for players who can ultimately succeed in cracking the code.

Key Takeaways:

• The digital asset universe is complex and ever-changing – to cut through the noise, we provide an overview of the entire digital asset taxonomy as it stands today
• Heightened regulatory scrutiny and a narrowing regulatory arbitrage window will cause a shakeup in the broader digital asset universe
• We see sizeable appetite for exposure to digital assets that receive a thumbs up from regulators and align with existing fund manager mandates / fiduciary duties – namely, security tokens
• There is an ongoing race between various exchanges / broker-dealers to become security token exchanges, but none of these players has successfully tapped into the industry white space at present
• While security tokens may not have experienced widespread adoption to date, we see tremendous growth potential in the coming decade, and estimate global issuance volumes to reach USD 4.1 trillion by 2030, and listed trading volumes to reach USD 162.7 trillion by the same period
• We expect to see a number of winners and losers among traditional capital markets participants, with security token exchanges to be among the key winners – however, the divergence in attitudes between players that are actively innovating and those that remain on the sidelines could see new national security token exchanges crop up and form monopolies

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