Digital Bytes – Jonny Fry
Weekending 6th July 2019
If you want one article, read this
There have been a number of interesting announcements around the use of Digital Assets with some interesting products and companies receiving the green light from regulators.
In Europe we have seen a Luxembourg-based business called Argento emerge and, from the UK, The London Block Exchange has launched what it calls “the world’s first genuine bitcoin (BTC) bond”. This new bond being issued by LBX, which is regulated by the UK FCA, will enable institutional investors to buy a bond that has no exposure to fiat currencies. It will have its own International Securities Identification Number (ISIN) code,and its price will be on all Bloomberg terminals i.e. another example of Crypto being adopted and accessible to institutional managers.
In the UK, Token Market (which had been very active promoting Initial Coin Offerings, raising over £240 million for 30+ companies funded by 170,000 investors) has had approval from the FCA to issue its own Security Token Offering (STO).The Token Market STO goes live on 8thJuly 2019 and will pave the way for Token Market to launch further STOs — all of which will be subject to much greater regulatory scrutiny, compared to 5,597 ICOs that have been launched to date. Once again pioneers like Token Market, offering STOs in a regulated manner, will make it easier for institutions to be more engaged with this asset class — not least because these Digital Assets will be backed by assets i.e. bonds, property, shares in companies.
In February 2019, the London Stock Exchange invested into a UK-regulated company called Nivaura, which has now issued both digital bonds and equities using Blockchain technology. Euronext, a Dutch-based stock exchange that has over 1,300 companies listed with a market capitalisation of over €3.5 trillion, has invested €5 million into Tokenywhich is based in Luxemburg. This investment in Tokeny will compliment Euronext’s investment in Liquidshares,where it joined a consortium of 15 other organisations. Liquidshares is a post-trade Blockchain-powered solution, connecting asset managers’ and broker and custodians’ information systems, thus enabling them to more easily invest in and process listed and non-listed European SMEs.
However, the regulators are also showing some signs of caution, with the UK FCA announcing that it wanted to ban the sale of “Crypto derivatives”to retail customers. It is understandable that the FCA has taken this stance, as crypto derivatives are a highly-geared way in which to get exposure to, in this case, an unregulated asset — Cryptocurrencies. While many have generated high returns, Cryptocurrencies are themselves very volatile. Furthermore, the Cryptocurrencies which largely have been created via an ICO are typically not listed, nor traded, on regulated exchanges. However, as we see more STO’s being launched which can be admitted onto regulated exchanges, such as Token Market, it will be interesting to see if the FCA allows derivatives on these Digital Assets.
Meanwhile, in the USA there has also been some caution and concerns being raised in particular about Facebook’s new Libra-Cryptocurrency, with the House of Democrats asking Facebook to halt developments until the regulators and congress have had the opportunity to review the potential risks. This is unlikely as Libra has been established in Switzerland, which is not just able to offer a lower tax jurisdiction but actively promotes itself as being more “Crypto-friendly”!
Finally, we have seen Augstin Carstens -the head of the Bank of International Settlements (BIS), in an interview with the FT, admitting“Many central banks are working on it; we are working on it, supporting them, and it might be that it is sooner than we think that there is a market and we need to be able to provide central bank digital currencies”.
This clearly shows how the development and adoption of Digital Assets are clearly now being driven “Top-Down” (by regulators and governments) as opposed to “Bottom-Up” (by tech start-ups funded by ICOs). It will possibly mean that the digitalisation or, as some people call it, the tokenisation of assets becoming a much bigger part of the world economy — much faster than many thought would be the case, even a few months ago!
Blockchain initiatives continue to be announced in the agriculture sector as more and more organisations understand the opportunities that this technology offers!
International Crops Research Institute for the Semi-Arid Tropics(Icrisat) is exploring how it can use a Blockchain-powered platform, called Elenev01 from India, in an effort to see how small Indian famers can improve their productivity and revenue from selling the crops they are growing. These improvements are hoped to be achieved by reducing the number of intermediaries involved,and allowing farmers to have more information about price of goods and connecting them with potential retailers, which is increasingly vital as merchants are being asked to prove the provenance of the goods they are selling.
Blockchain technology is also being used to record and share farm-data as, by having one trusted secure ledger of information, it eliminates the challenges that are so common in the childhood game of “Chinese whispers”. Data and information on crop yields, soil conditions, moisture levels etc can easily be misinterpreted, as records are passed from the farm through a chain of different third parties so that, after three of four times, this information can easily be misunderstood from what the actual real data is saying. The Kansa State Universityhas produced a report that offers a summary of some of the above challenges and how Blockchain technology is able to address them.Blockchain technology is able to help agricultural supply-chains to track the provenance of agricultural goods and, using sensors and Internet of Things (IoT), it is possible to monitor the conditions that goods have been kept in, from farm to retailer.
In Sir Lanka Aon(the global insurance firm), has teamed up with Oxfam and Etheriscto offer insurance to 200 small farmers so they can protect themselves from damage to their crops due to extreme weather. Bojan Kolundzija, the country director of Oxfam in Sri Lanka has said “Allowing farmers to access the blockchain platform is an important milestone that is bringing an effective and affordable risk transfer mechanism to a large portion of the Sri Lanka economy.”
Blockchain technology is able to automate much of the traditional claims process, as the farmer will not need to submit a claim and the insurer will not need to incur the cost of sending claims’ adjusters to inspect the damage. Therefore, the cost of processing and handling the claim is faster and cheaper and more trust is generated. Thus confidence is created to encourage smaller and often less-sophisticated farmers to protect their livelihoods.
Blockchain is increasingly being used insurance companies
MetLife, the US quoted insurance company with over 90 million customers worldwide, is piloting a project in Singapore called Lifechain. The other firms involved with Lifechain are Press Holdings and NUTC Income, which collectively are trying to simplify the process for relatives when someone dies. Once an obituary is placed in The Straits Times, these details are sent to LifeChainwhich forwards a consent form to the relatives and the deceased’s National Registration Identity Card is entered on to Lifechain. Lifechain will then search to see if the deceased had any valid life insurance policy in force. If a policy is found, then a claim will automatically be submitted so the claims process can commence.
It is estimated that in the UK there is over £2 billion of unclaimed life insurance, as relatives do not know that their loved ones had insurance policies, and the insurance companies are unaware that one of their insured clients has died. In the USA, according to the National Association of Insurance Commissioners, over 24,900 people in the just the last 2 years have tracked down life insurance policies and claimed over $360 million.
Insurance firms are looking at a variety of ways that Blockchain technology can be used. In the UK BlockClaim, which was developed at Imperial college in London, has recently secured £500,000 of funding for a platform that uses Blockchain technology for claim management, and AI to help as a fraud filter. The platform scans phone calls and emails to search for irregularities in a claim to try and identify fraud, while also managing the claims process more efficiently. The intention is claims can be paid faster, while spurious claims can be queried and rejected.
Also in the UK Legal and General has announced that it is going to use Amazon’s blockchain expertise to launch estua-re, the first Pension Risk Transfer (PRT) reinsurance platform. The intention is that estua-re will handle every stage of the PRT reinsurance process, including pricing, claims handling, financial reporting and collateral and utilising data stored on a Blockchain. Using this new platform, it is believed that costs-savings can be generated, as well as creating much greater transparency. It will enable a secure record of information that cannot be altered, but easily retrieved by different parties about annuities — potentially in 50 years’ time.Legal & General Group’s PRT transactions include the largest U.K. risk transfer to date, in 2018, when British Airways insured £4.4 billion in liabilities of its Airways Pension Scheme.
Blockchain technology is being used in the insurance sector more and more as organisations understand how to utilise Blockchains’ secure, transparent, real time characteristics. Increasingly more transactions are being digitised and Blockchain technology enables the insurance companies to offer products that are more suitable and efficient in our digital economy.
There has been considerable hype about how tokenising property will boost liquidity, as it will allow smaller investors access to this asset class which historically has been the preserve of institutions and the very wealthy. Whether this is true or not, we will have to wait and see, but we are beginning to see different parts of the world tokenise property and slowly we are seeing more and more acceptance of the idea.
In France, a €6.5 million property in Boulogne (according to Forbes) is the first piece of Real Estate to be tokenised. The property was transferred to a joint stock company and held by 100 tokens, following which each token is then capable of being divided in to 100,000 tokens. This means that, for as little as €6.50, one can own a fraction of the building. In the USA last year, a property in New York (valued at over $30 million) was tokenised and was touted, at the time, as being a way to finance property instead of relying on traditional banking arrangements.
Meanwhile, a company called ASA, based in Dubai,is looking to tokenise property in the UAE and Portugal. Also in Dubai a company, called Darico,has recently launched a service to help organisations tokenise assets, such as property, into tokens.
So, one can see that a number of jurisdictions are looking at how property can be held in a different way and, while the promise of additional liquidity that tokenisation promises is yet to be seen, there are a number of other interesting benefits that tokenisation of assets offers. In essence we are increasingly finding that economies are becoming more and more digital as this can offer greater transparency, stronger compliance monitoring and regulation, thus enabling engagement with people who are, themselves, more digitally savvy and reliant than previous generations.
Are we to see an asset management war?
Blackrock (the biggest asset manager in the world, with over $6.28 trillion under management) is capitalised at $72.billion and, during the quarter ending 31stMarch 2019, generated $3.246 billion of revenue. Facebook is valued at $550 billion and, as at March 2019, it had over 2.38 billion users and generated $15.08 billion of revenue. Blackrock only has $6.49 billion of net cash and short term investments, compared to Facebook’s $41.12 billion of cash and short terms investments. Despite Blackrock’s size and global reach (having offices in over 100 countries) it is still very dependent on the Americas as they make up 62% of the firm’s funds under management. Compare this to Facebook, where it is estimated that more than half of the US population (169.5 million people ) use Facebook out of its 2.3 billion user-base. It is obvious that Facebook not only has greater distribution i.e. more direct clients that Blackrock, but Facebook has far greater penetration in faster growing markets outside of the USA. So why is all this important? Well, quite simply, if you have the ability — cash and the type of global distribution and brand that Facebook has — then even the biggest asset manager in the world needs to pay attention since Facebook has announced it wishes to launch an Exchange Traded Fund (EFT).The Facebook ETF will be based on Libra, which is a Digital Asset backed by a basket of currencies. Therefore it is not completely dependent on the fortunes of the US$, which it would be if it were backed by an asset that is priced in US$ (like gold), which is what theEditor of Forbes magazine is calling for.
Libra’s acceptance has received a boost from the third biggest economy in the world — Japan — as the Japanese Financial Services agency believes that Libra is unlikely to be a Cryptocurrency. It has stated that Libra will more likely be categorised “as general money transactions and remittances.”
The massive profits that fund managers have generated for years and their annuity style income (they earn a fee based on the funds that they manage, so having much greater visibility of their revenue) has meant that asset managers enjoy a high PE ratio. Blackrock’s PE is currently 16.8, although this pales into insignificance compared to Facebook’s current 23.35, as investors believe that Facebook is able to grow its revenue and profits faster than many other public companies!
If Facebook focuses more of its attention to asset management, and Libra is just the start of a series of products and services Facebook is going to offer its users, then traditional managers need to pay very careful attention. Facebook has both the cash and the followers to become a substantial asset manager extremely quickly, and also has massive exposure in parts of the world which are growing fast, and where its younger citizens are already digitally engaged!
Digital Assets are gaining popularity with traditional investors
Almost daily there is a report of traditional investors embracing Digital Assets. The CEO of Goldman Sachs last week, when asked if his firm is looking to launch a Digital Currency like JP Morgan, replied “Assume that all major financial institutions around the world are looking at the potential of tokenisation, stablecoins and frictionless payments”
Meanwhile, Wall Street seasoned-investor Henry Kravis (co-founder of KKR), has been investing in Parifi Capital which has $190 billion undermanagement, and claims he now spends most of his time researching Blockchain and Cryptocurrency opportunities. Billionaire Peter Theil (co-founder of PayPal) has, according to Blomberg, alos been investing in Blockchain and Digital Assets.
The chart below shows the volume being traded in Bitcoin and as you can see even though the price of Bitcoin is still over 40% below the 19,454 it reached in 17thDecember 2017 the volume of Bitcoins being traded has been strong over the last few months.
Fidelity, with over $2.5 trillion undermanagement, carried out a survey of 441 of its institutional clients and found that 22% had already bought a Cryptocurrency, and 47% thought that this asset class had a place in the funds it manages.
One of the concerns that has held back institutions has been that many of those that use Cryptocurrencies, like Bitcoin, are carrying out illegal activities. Therefore, in the recent analysis from Chainalysis, Bitcoin transactions have fallen in 2012 from 7%, to less that 1% in 2018.
BitMex, which is the worlds’ largest Crypto platform, last week reported over $16 Billion of trades in a day, demonstrating the clear demand and interest in this new asset class. Meanwhile, the Chicago Mercantile Exchange (CME) announced Bitcoin futures hit $1.7 billion in notional value traded on June 26th, 2019.This represents a 30% increase from its previous high, reportedly as a result of institutional interest.
Possibly one of the most powerful endorsements recently came from Mark Carney, Governor at the Bank of England who said,“Distributed ledger tech (DLT) projects have the potential to ‘unlock’ billions of pounds in capital and liquidity — and that they might one day see closer cooperation with the central bank itself.”
STOs gather momentum as does the STO infrastructure
In a recent report from Blockstate, in Switzerland, it revealed that so far in 2019 there are over 120 planned or launched Security Tokens Offerings (STOs). These STOs have already raised over $1 billion, compared to 2017, when there were only 5 STOs which raised $67.5 million. STOs are set to replace Initial Coin Offerings (ICOs) as a method to raise capital and, because they are subject to much greater regulation and typically backed by real assets such as bonds, equity, commodities, property etc, they ought to perform in a much less volatile manner. Given the higher regulatory bar that a STO has to comply with, STOs are likely to be much more attractive to institutional investors and will be traded on regulated exchanges across the world. The Blockstate report highlights that five countries are dominating STOs -Estonia, Germany, Switzerland, UK and USA — who between them, account for 75% of the STOs issued to date.
The infrastructure to offer more STOs also continues to develop as seen by the announcement of the tie-up between Globacap and Archax this week, both of which are regulated by the FCA in the UK. Globacap is a platform that has been built to be able to issue Digital Assets/ STOs and is similar to Tokeny (which has just had €5 million invested into it, as detailed above by Euronext) and also has a partnership with Archax to use its exchange. In 2018, Globacap tokenised its own shares. Then, in 2019, the platform tokenised two UK-based companies, helping them to raise capital, with Globacap serving as the custodian. The purpose of the platform is to provide built-in compliance to properly transfer ownership from traditional assets to Digital Assets.
Archax is looking to officially launch its exchange, which is intended to trade Digital Assets later this year. It will be using Blockchain technology to reduce costs and offer more transparency, both of which Archax believes are of great interest to the institutional investors that it is targeting.
The first STO in Germany, which was authorised by BaFin, took place in March 2019, raising €3.5 million for a company called Bitbond (a business that offers loans to small companies).
Therefore, there is plenty of evidence that not only are STOs gathering greater traction, but as we see more infrastructure in place it will enable asset managers and banks to be further engaged with Digital Assets. We have already seen the likes of Goldman Sachs and Fidelity offering custody solutions and Avia providing STO insurance, so all that we really need is evidence of good liquidity for STOs. If we see attractive trading volumes in STOs, Digital Assets really will be able to give their analogue paper based alternatives a real run for their money!
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