ASK MAT: What are the risks and rewards of the tokenisation of real-world assets, the risk being to investors and the issuers

ASK MAT:

• What are the risks and rewards of the tokenisation of real-world assets, the risk being to investors and the issuers

MAT SAYS:

• Thank you for such a topical question. Jersey, along with many other jurisdictions, sees tokenisation as the new [nest] frontier of financial services and does not want to be left behind.
• This process offers significant rewards and introduces risks for investors and issuers.
• Below is my analysis of the key considerations of the risks and rewards for investors and issuers when participating in the Tokenisation of real-world assets (RWAS), which involves converting physical or financial assets, like real estate, art, commodities, or bonds, into digital tokens on a blockchain.

KEY CONSIDERATIONS

1. Regulatory Evolution:
   • Investors and issuers must stay informed about regulations as authorities (e.g., JFSC, SEC, FCA) increasingly scrutinise tokenised assets.
2. Due Diligence:
   • Investors should verify the credibility of issuers and platforms, while issuers must ensure robust legal and technical frameworks.
3. Market Maturity:
   • The tokenisation market is still developing, with risks tied to low adoption and technological infancy, but rewards will likely grow as infrastructure improves.

Below is a concise analysis of the risks and rewards, tailored to each group.

REWARDS

For Investors

1. Increased Accessibility: Tokenisation lowers barriers to entry by allowing fractional ownership. Investors can buy small portions of high-value assets (e.g., a $1,000 stake in a $1M property), democratising access to markets like real estate or fine art.
2. Liquidity: Tokenised assets can be traded on secondary markets, offering liquidity for traditionally illiquid assets like private equity or real estate.
3. Transparency: Blockchain’s immutable ledger ensures transparent ownership records, reducing fraud and enhancing trust.
4. Diversification: Investors can diversify portfolios with fractional stakes across multiple asset classes, reducing risk exposure.
5. Global Reach: Tokenised assets can be traded on global platforms, enabling investors to access opportunities beyond their local markets.

For Issuers

1. Access to Capital: Tokenisation opens up new investor pools, including retail and international investors, increasing fundraising potential.
2. Cost Efficiency: Blockchain-based issuance reduces intermediaries (e.g., brokers, custodians), lowering transaction and administrative costs.
3. Market Expansion: Issuers can tap into global markets, expanding their reach beyond traditional financial systems.
4. Faster Transactions: Tokenised assets enable near-instant settlement compared to traditional markets, improving efficiency.
5. Innovation Appeal: Offering tokenised assets positions issuers as forward-thinking, attracting tech-savvy investors and partners.

RISKS

For Investors

1. Regulatory Uncertainty: Tokenised assets often fall into unclear regulatory frameworks. Changes in laws or enforcement (e.g., securities regulations) could limit trading or impose penalties.
2. Market Risk: Tokenised assets are volatile, especially in nascent markets. Low liquidity in secondary markets can lead to price swings or difficulty selling.
3. Counterparty Risk: Investors rely on issuers, custodians, or platforms to manage the underlying asset. Mismanagement, fraud, or insolvency could result in losses.
4. Technology Risk: Blockchain platforms are vulnerable to hacks, smart contract bugs, or network failures, potentially compromising tokens or funds.
5. Valuation Challenges: Illiquid or unique assets (e.g., art) may be hard to value accurately, leading to mispricing or disputes.
6. Limited Legal Recourse: Due to jurisdictional complexities, enforcing rights or recovering losses may be difficult in cross-border tokenised markets.

For Issuers

1. Regulatory Compliance: Issuers must navigate complex and evolving regulations (e.g., AML, KYC, securities laws), risking fines or legal action for non-compliance.
2. Reputation Risk: Technical failures, fraud, or mismanagement in tokenisation projects can damage an issuer’s credibility and deter future investors.
3. Operational Complexity: Tokenisation requires expertise in blockchain technology, smart contracts, and cybersecurity, increasing operational costs and risks of errors.
4. Market Adoption Risk: Low investor demand or limited secondary market liquidity could undermine the success of tokenised offerings, leading to financial losses.
5. Liability Risks: Issuers may face legal liability if tokenised assets underperform, are misrepresented, or fail to deliver promised returns.
6. Cybersecurity Threats: Hacks or breaches in the tokenisation platform could result in stolen assets, financial losses, and lawsuits.