What are some of the value drivers and challenges facing tokenization?
Tokenization has several key value drivers, including operational efficiency through blockchain infrastructure, settlement efficiency with near real-time transactions, programmability via smart contracts for automation and cost reduction, diversified product development options with asset compositions, and increased liquidity by fractionalizing and trading illiquid assets. These value drivers streamline operations, reduce costs, improve transparency, bolster data security, spur innovation and broaden market access.
Challenges in tokenization include the evolving regulatory environment, developing distribution networks and interoperability, misconceptions about blockchain infrastructure, ongoing development of the ecosystem and supporting infrastructure, and the upfront investments and switching costs required. Overcoming these challenges is essential for successful implementation and widespread adoption of tokenization, and differing ways of dealing with them are already underway in various regions.
Regulation of digital assets continues to advance
To effectively navigate the market, Canadian asset managers must proactively stay abreast of regulatory developments to gain certainty and confidence in the future stability and credibility of the asset class. There are many ongoing efforts worldwide to regulate and supervise trading platforms for digital assets and tokenization.
Canada has taken a leading role in regulating not only public crypto funds but also crypto trading platforms and custodians. At present, 12 platforms are registered with securities regulators, and 9 crypto trading platforms operating under pre-registration undertakings. In response to recent insolvencies in the industry, Canadian regulators have strengthened requirements for pre-registration undertakings, specifically focusing on asset holdings, reserve requirements, margin operations, third-party guarantors, unregistered proprietary tokens and working capital assessment methodologies.
Globally, Europe has adopted the Markets in Crypto-Assets Regulation (MiCA), which is now in the implementation phase. The Hong Kong Monetary Authority has proposed to legislators that a regulatory regime should be implemented for virtual assets and stablecoins.
The US regulatory position is still evolving, with several bills in Congress proposing the regulatory oversight of crypto assets. However, there are still some differences between Canadian and US regulators on the treatment and legal classification of crypto assets.
Overall, there is a broad expectation of consolidation and streamlining of regulation across jurisdictions through a global regulatory standard in the next 12 to 24 months. The coordination of Canadian, US and European regulators will allow for the creation of strong guardrails that will provide asset managers and investors with confidence in the space. However, truly innovative asset managers will need to maintain rigorous internal safety mechanisms as well through risk management practices beyond regulation.