Paramita: Hello and welcome to PwC TechTalk. A few months back, we held an event around securitisation where one of the keynotes was based on how tokenisation is a new form of securitisation. Now, if you're like me and wondering how these two are connected and what do these terms mean in the first place? Well, listen on, as we speak to the keynote speaker himself, Luc Falempin, the CEO of Tokeny.
Paramita: So we had a couple of episodes on blockchain and tokenisation. But for our audience, it will be good if you can tell me what is tokenisation, first of all, before going into assets.
Luc: So basically, tokenisation is a process to represent assets rights on the blockchain. So basically you have the securities and the security will be represented by a token on the blockchain. And so what is a token? The token is a of keys. So you can make the parallel with an email, you know, email plus password. The same with a token. You have a public address and a private address. And if you control those two addresses, you get access to this key token. And this token can represent an asset, a real security.
Paramita: So what kind of tokens do we have, are we talking about... apart from assets, what kind of other tokens are there?
Luc: So it depends on the jurisdictions actually. In the US, everything is security. In Europe, in most countries now we have a distinction between three types of tokens. The first type of token is about cryptocurrency: Bitcoin, Ethereum, Monero and so on. So these are nothing more than a token. So it's a currency. It can be traded, shared within, as a blockchain. But it has no other purpose and it's not very programmable. The second kind of tokens is about utility tokens. So basically these tokens give you access to a decentralised network and you can buy services or goods with these tokens...
Paramita: All services and goods?
Luc: Yeah. It usually gives you access to a network. For example, Facebook could have a utility token and because you have tokens, you are part of the community.
Paramita: They're thinking about it, aren't they?
Luc: What they're doing is a bit different. But it could be an example. And the last type of tokens is about security tokens or investment tokens. It depends on the definition, but basically it represents financial assets.
Paramita: OK. Why did people suddenly start thinking about tokenisation?
Luc: The blockchain technology is actually quite new. And for four-five years, banks are trying to do things with blockchain, but of course they are a bit scared to lose control. So they created private blockchains and did some experimentation. But in 2017, bitcoins and other crypto currencies exploded. We got a lot of awareness about blockchain and many people started to use blockchain technologies and wallets and tools. So basically today you have public blockchains available, resilient enough to become a viable infrastructure for financial markets, especially for private markets where you have almost no infrastructure. In public markets, you have an infrastructure. It's expensive with a lot of intermediaries, but it works. For private markets, there is nothing. So markets are very local. It's very hard to transfer assets from one person to another. So now with the existing technology, we can use these shared infrastructure. And every stakeholder can be part of it. And we can apply compliance and controls on top of it. So I would say that now you have everything you need to start doing real financial assets on the blockchain and moreover, the regulation is evolving and step by step, blockchain is becoming a legitimate infrastructure to do so.
Paramita: To do all kinds of financial transactions?
Paramita: They're saying that tokenisation is securitization 2.0, that it's going to replace securitisation. And some are saying that it's just you know the other side of the coin. First of all, just in quick words, can you say what is securitisation and what are your thoughts on these statements?
Luc: A simple definition will be securitisation is basically creating financial assets. And so you take something valuable and you create financial instruments within a set of rules. And to be sure you can get investors and owners and so on.
And so tokenisation is actually just a new way to do securitisation. When you do a securitisation at the end, you get paperwork, get papers and and with tokens, with tokenisation at the end, you get a digital key. And this key can be programmable because it's a code on the blockchain, so just a digital format for securities. It's nothing more. But because it's programmable, it opens up a lot of perspectives, a lot of opportunities. We can automate compliance, trades. It brings transparency and so on. But at the end, it's only securities.
Paramita: How does it work? Can you explain with an example?
Luc: So, for example, for closed end funds for real estate, you have the initial subscription. So you involve the investors. Now with technology, we can do this full process digitally. And so basically you can onboard investors from all around the world. And then for the compliance during the onboarding process because you will not onboard an investor from the US, like an accredited investor from the US, the same way as a retail investor in Europe and so on. So we can play with exemptions, for example, to onboard all of these investors. At the end of the onboarding, of this sale of shares, we will do two things: we will create onchain identities.
Paramita: What is an onchain identity?
Luc: So basically it's a piece of code on the blockchain, it's automatic. It's nothing to do for the investors. It has to be simple. But this piece of code on the blockchain will link the proof of KYC and the wallet. So the wallet allows you to do operations in the blockchain and it will be linked as a proof of KYC (Know Your Client).
So basically the issuer has to know exactly who are its investors at any time. So on the blockchain, we create an identity for every investor. So everybody is identified. So we know exactly who does what, at least the issuer. And on the blockchain, you don't have personal data, of course, but the issuer can track its investors at any time, even if they transfer shares to other people and so on. So we create these identities and we allocate tokens to every shareholder. So as a shareholder, you subscribe, you pay for your investment and then you receive one identity and your tokens. With these tokens, it creates basically a secondary market. So without too much pain for the issuer and because in your example, it's a closed end fund. So the issuer needs, as a fund manager, some time to buy the buildings and to get revenue from them. And in 10 years, maybe it will close the funds. But for investors, maybe they don't want to be blocked in this investment for 10 years. So thanks to tokenisation, the shares become transferable. And every investor is able to transfer shares to someone else, an existing shareholder or an external new shareholder. And the whole transfer process will be compliant because compliance rules are embedded in the financial instrument itself, in the share. So every time there is a transfer, the compliance rules will be verified to ensure automatically on the blockchain thanks to the rules set up by the issuer. So you have basically two sets of rules. You have rules for the whole offering, otherwise countries, maximum number of investors, that kind of rules and rules for investors.
So they need to be identified. So we can manage that with the identities on the blockchain. So automatically on the blockchain a validator, as we call it, will verify the trades. So for the issuer, it doesn't change anything. At any time, he can see who owns what. And for investors, it brings some transferability plus a lot of other advantages like corporate actions and so on, we can automate a lot of operations such as revenue distributions, for example. But I guess the market is not there yet.
Paramita: Yes. That was my next question, actually. What are the benefits? Why should investors go for tokenisation?
Luc: So for investors, as I said, it will bring transferability. And this transferability step by step will bring liquidity. Basically, a token is interoperable and is programmable. So if everybody uses the same infrastructure where you can share value, it creates tremendous opportunities. Everything becomes possible. It's digital. So it's fast. It's transparent, it's immutable. And so you have a lot of advantages just because it's digital, basically.
Paramita: And what are the risks?
Luc: Yes. The risk is that it's a new industry. So everybody's learning on the way. And when you can code and automate everything, it doesn't mean you will code and automate the right things. You need some control points. You need to be sure you defined the right rules. And, of course, you will discover some weird behaviours, some new market behaviours and so on. And so we have to be sure we always respect the best practices from the existing financial industry. And step by step, we'll bring it to the next level.
Paramita: And what about regulations? What's happening in Luxembourg? Do we have any kind of a proper infrastructure for this? A framework for this?
Luc: Yes, last Valentine's Day, on the14th of February, a new law was voted in Luxembourg to allow the transfer of securities on the blockchain. It's very large. Now it's officially legal to transfer securities on a distributed ledger. The word blockchain is actually used in the regulation. And so before it was not illegal. But now it's clear that in Luxembourg, it's authorised. And it's a step forward in terms of dematerialisation of assets and securities. So definitely it's interesting. The see the next step, I guess, for Luxembourg, will be to vote a law about the issuance, on how shall be the issuance of these tokenised securities. Could it be directly native on the blockchain. Or should we issue a security and then represent the security on the blockchain with a token.
Paramita: And it's always a public blockchain, right?
Luc: A you can do it on private blockchain as well. But our vision at Tokeny is that if you use a private blockchain, nobody will use your blockchain. So you better use the database and most of the time it's like this. If you use public blockchains, it's interoperable and you have already tools and a community of developers building on top of it. So it's a whole ecosystem and at least at Tokeny with our 25 employees will not be able to reinvent the whole thing, the whole financial system. So here we tried to use a resilient infrastructure such as Ethereum, one of the main blockchains. And basically you have more than 200,000developers in the world working.
You have 8000 thousand nodes. So Ethereum will not stop tomorrow. And it's actually way cheaper to hack a big financial institution than hacking Ethereum. And so we think it's pretty secure. And also tools are available for anyone like in the next generation of smartphone you will have a built-in wallet for Ethereum.
Paramita: Built in as in?
Luc: In some browsers now to access Internet on your computer you can have a built-in wallet as well. So basically every investor can do self custody. You can own your assets. You don't need to create a bank account here and a bank account there. Every time you want to invest, you become the account and then you give access to who you want, to your robot advisor, to your asset manager or whatever. So it's a shift. It will take time, but technically speaking, the solutions are there.
Paramita: What happens if somebody wants to sell it, the asset?
Luc: So the asset can be traded, shared on the blockchain. The whole purpose of the blockchain is actually to transfer value.
But of course, you need to find a counterparty. And so we are working on that kind of solutions. And more and more, you have exchanges that will become alive. And so some of them are trying to get the proper licences to operate. So we think the liquidity will come in various forms. But it will come step by step. But today, if I have a tokenised asset, I can transfer it to you directly without a lawyer, without any intermediary, and directly from my phone to your phone.
Paramita: Just one quick question -- I know that I'm probably harping on a little bit on the risk side but I'm just trying to be the devil's advocate. I'm sure you have like lots of clients from all over the world, Europe...
Luc: We have clients on five continents already. But the market evolved a lot in the last two years. So we have different kinds of clients.
Paramita: What are their main fears about this? Do they express any kinds of apprehensions about the entire thing?
Luc:I think the regulation is still the main pain point, because if you get a global reach with your tokenisation process, you also unfortunately get the global compliance.
You need to apply the global compliance. And so technically we can enforce all of those rules. But for each offering, each issuance, it can be different depending on from where you issue and to what kind of investors you want to distribute to your securities. So it's still a bit complex to define the distribution rules all around the world. But once you get this rules, after we can enforce them for every trade. So I guess it's just because it's new, it's new for law firms, it's new for the whole ecosystem. So it's time to define the proper framework for tokenisation.
Paramita: What brought you here in this industry? What brought to you into tokenisation?
Luc: I am an entrepreneur for almost 10 years now. My previous company was in the e-commerce industry, so it was not a new industry. Tokenisation is great because for everybody it's new. And so this previous company was doing online marketplaces. So it was a big software, big API with different interfaces for different stakeholders.
So it is basically what we do today at Tokeny... a big transactional platform...
Paramita: Why I'm asking you this because you must have had this "aha moment" or something like thinking, oh, my God, this is big...
Luc: Yeah, I think this special moment was when actually I was a student. I wanted to invest 1000 euros. It was all I had at that moment.
And I was like OK how could I invest my money. So I wanted to buy Google shares. I could buy two. So I opened a bank account and I think like two months later I was able to buy the shares. And basically it was costing something like 100 euros and I didn't even get my shares at the end. It was a indirect ownership, you know. And so I was like does it work that way for everybody? So, of course, now it's changed a bit. Banks evolved fortunately. But I think at that moment I was like OK there's something to do in the investment market. And what I did is buying Bitcoin. It was in 2011. So I didn't buy enough. But yes with Bitcoin it was simple. You just made the transaction and you just said OK I want to buy and you pay and you get your assets and you get your assets directly in your wallet and you control your wallet. So I think it's where the market should go.
And now everybody wants digital banking. You want your bank in your mobile phone for your money. But what about your assets? People want the same. It was not possible before and now it's possible. So step by step, we getting there.
Paramita: And what do you think is the future?
Luc: I think the future is when everybody will control his/her own asset, being their own account. And, yes, will be able to share value, to use this value for collateral, for everything that we own that is valuable could be tokenised and therefore be useful.
Paramita: One last question. What is the big benefit of tokenisation? What would you say if somebody, a layperson asks you why should people go for...
Luc: The investor or the whole ecosystem?
Paramita: The entire ecosystem.
Luc: For the entire ecosystem, I would say interoperability, even if it's very hard to say "interoperability".
Because right now in traditional finance, there's a lot of intermediaries and they all do very complex operations, sometimes the same operations just because they don't have the same information at the same time with same point of view, the same data. It's a mess because it's based on papers. So if you base that on real data because it's digital, I think it would change everything. People will not get fired because they become useless. Just their job will evolve. And I think banks are evolving very fast. It's very complex for them because of regulation, but they are changing very fast. So I hope they will benefit from this new technology and therefore they will be able to propose to their customers and to everybody in the industry some new kind of investments where you don't lose half of the value on the way.
Paramita: Thank you so much for being here. It was really nice talking to you.
Luc: And thank you very much for having me. With pleasure for the next round.
Paramita: So that's all we have time for today. My thanks to Luc. I'll be back next week with a new episode of PwCTechTalk.
Commmunication, PwC Luxembourg
Tel: +352 49 48 48 5821
Commmunication, PwC Luxembourg
Tel: +352 49 48 48 5821