Discussions about the recent boom in digital assets and its acceleration despite the ongoing tokenized securities market kicked off at Sibos 2022 in Amsterdam. Yuval Rooz, CEO and co-founder of Digital Asset, sat on a panel and emphasized that he believes that “fractionalization is a red herring.”
Fractional digital assets are taken and locked into a smart contract, where they can be broken down into fungible ERC-20 tokens of equal value. From there, a person can buy as many shares of a digital asset as they want. A major advantage is that an individual can have complete ownership of a unique item. However, for some assets this has meant that prices – and associated costs – have skyrocketed.
Rooz went on to say that “fractionalization is the idea that you can trade an asset that traditionally would have been worth a lot of money if you traded the whole thing. Now you can divide it into smaller components and people who don’t have a lot of money can get a piece of the asset.
“It’s a great thought process, but what’s behind it is the transaction fee and the cost of a chain of lawyers who have to process it by hand. Everything can be represented as an ERC-20 is a red herring, because it is about the complexity of the asset that matters. This is why Robinhood’s fractional trading of US stocks is very efficient. It’s cheap and you can do it quickly.”
Rosie Hampson, executive director, Goldman Sachs, added that fractionalization is as much about mobility as it is market access. As well as digitizing new types of assets, Hampson explored how the industry must also consider the impact and opportunities for traditional services and how increased liquidity can be created for these products.
“Using blockchain to represent an asset token can facilitate atomic swaps that create assured intraday liquidity for the market and mobilize traditionally illiquid assets, offering risk reduction due to their instantaneous nature. Fresh innovation is not just about opening up opportunities makes when it comes to a secondary market perspective.It also thinks about how these assets move in a more efficient and more effective way.
The panel further discussed how the fundamental benefits of blockchain such as immutability and transparency can be leveraged to improve traditional and new assets in the way they move, the way they are structured and the way they are traded.
David Durouchoux, deputy CEO at Société Générale, mentioned that when considering blockchain, the sector must remember that the “fundamental characteristic of the technology is that it is disruptive.”
On this point, Jens Hachmeister, Head of Issuer Services and New Digital Markets at Clearstream, said that with this infrastructure the private – or public permissions – should be understood. “This is the second priority. But the first thing to consider is: what is the change happening to the market infrastructure and the addition of distributed tools in the central elements of what we have today? I believe that the next generation of digital market infrastructure must be inclusive – meaning that it is made up of existing legacy and decentralized elements.”
Before using technology, education is required and although there is a clear pull from the retail market, this enthusiasm needs to shift to the institutional market. One challenge permeating this space is that “things tend to be more complex in the short term before they get easier again, as Hachmeister said.