The End-to-End Journey of a Tokenised Asset | EBC12

Good morning everyone, and I hope you enjoyed the previous panel discussion. I hope we can develop what was discussed there . So, today we will talk about the lifecycle of a tokenized asset from start to finish. Tokenization is often viewed as the ultimate goal – ultimate goal – placing an asset on the network. But graduation the network.

But graduation is just the beginning is just the beginning , and the institutional asset is testing? Is this better for everyone? Perfectly. I should have raised my teeth like that young man over there . OK.

An institutional asset must be properly structured, distributed among the right investors, securely stored and maintained, and ultimately have true liquidity true liquidity . So, in our panel today, we will take you through the full lifecycle, from legal construction to the question of whether tokenization and tokenized assets can truly work at scale in the marketplace. So, without further ado, I present to you our esteemed panel. I hope we will have a very interesting interactive session. So, first of all, uh, Kathleen Rinne, global head of digital assets at Invesco, a $2.

5 trillion asset management firm that this year took over management of one of the industry's largest tokenized treasury funds in the Superpower. Miguel Vaz, good morning, Miguel. Managing Director of Hauck Aufhäuser, an institutional custodian of cryptocurrencies and tokenized assets, licensed by MiCA and part of the ABN AMRO group. Nico Brown, good morning, Nico. Vice President for SSA at DZ BANK.

DZ BANK recently issued fully digital bonds together with KFW using smart smart bond contracts that were settled in about 1 hour, as opposed to the usual 5 days, and I believe we will look at this in a bit more detail during the discussion. And finally, Jonathan Koenig, Chief Solutions and Marketing Officer at Swiat, a Frankfurt-based provider of digital securities infrastructure that supports issuance and registration under the German EWPG system. And good morning from me . My name is Stuart Peterson, your moderator today from Weidmann, a Swiss-based provider of digital asset infrastructure and orchestration that powers some of the largest banks and brokers in the EU, Switzerland, the Middle East, Turkey, South Africa and soon the UK, where regulated regulation for regulated institutions has been introduced regulated institutions has been introduced . So, I want to walk you through five simple steps and five simple questions, covering the full lifecycle of a tokenized asset.

So, let's start from the beginning with the structuring and legal framework. So legal framework. So , before the token or our token, as we 'll call it in this session today in this session today , before our token is released, there's a lot of legal and structural work that needs to be covered. So, Miguel from Hauck Aufhäuser, you are registered with MiCA and have two licenses, both as a registrar and a qualified custodian. How does MiCA actually affect how an asset is structured prior to issuance?

And do structuring teams today consider storage and licensing restrictions? Yes, thank you for the question. So, I have different points of view. Um, and I think in relation to your question, the first part is that I think people are turning to tokenized securities with the prospect of the benefits the prospect of the benefits that they're going to get from Mika's assets, but then the structuring is n't happening, according to Mika, is it? Then we move into the securities area , and that's where we start doing all the additional regulatory work regulatory work that we need to do.

So, with that perspective, with that goal in mind, I think people actually want to get what they're going to get from cryptocurrency, you know, transaction neutrality, they want, um, cheaper, faster, more, more investors. So that's what they're aiming for. But ultimately, what I think people miss is, I'll just give you an example, think about a wallet address that would have a stablecoin as a means of payment, that would have tokenized securities, would also have some ETH or something like that, would be under MiCA like that, would be under MiCA , under PSD2, under MiFID and local securities regulations. And we need to make sure that people understand when they structure products that in order to guarantee access to assets, we're going to have to make sure that's already built into the operating model, because the operating model is actually what model is actually what we're selling with tokenized assets. Does that go there?

Yes, absolutely. I think so. Hmm, I mean, we're going to be looking at a lot of regulatory issues, you know, in today's discussion, but maybe I can invite you, Jonathan, from Fiat Switzerland. Hmm, you're arguing that the regulatory framework is actually broader than just MiCA with a DLT pilot regime. Hmm, what regulatory changes are actually needed to unlock an open and scalable market and an end-to- end marketplace, and perhaps where regulation is holding us back today?

Yes, of course, it's always a very intriguing question about what holds us back about what holds us back . It's mostly us, not regulation, but I'll come back to that later in the discussion. Hmm, but yes, certainly from our perspective, um, MiCA certainly offers exciting new types of asset classes. However asset classes. However , um, with the DLT pilot regime, any MiFID-type instrument can be digital.

Hmm, and it gives us a lot of game environment, I would say, to explore and act in. And, um, everything we already know, everything we could scale in the old world, we can now scale in the new world with all the added potential. And, um, as for what's holding us back, I would say there are two key aspects. Hmm, first of all, we still have a very fragmented legal framework in Europe in the sense of civil law. There is no way to issue way to issue , um, a bond at the European level with European jurisdiction for that, because, um, we have individual states, um, and they have their own civil law on how to create bonds.

So, um, what we see is fragmentation in these, um, different countries where there are individual providers that offer, for example, tokenization services in this particular mentality, like in Germany, the German Electronic Securities Act. And there are also difficulties with working abroad and across borders within Europe, within the European Union. And that is something that we see that is also ongoing discussions with the Ministry of Finance in the new Savings and Investment Union, but there is still work to be done in this area so that we can overcome the fragmentation in this area. So, how, and maybe just to push this a little further, especially given that we in Spain are in the European Union, and obviously MiCA allows passporting in many use cases, how can you make sure that you address this fragmentation? Do you have any recommendations for the European Union in this context, perhaps regarding MiCA 2.

0, which we all hear is coming in the future? But what needs to change in regulation to allow for interoperability at scale across the European Union, even within it, which is supposed to be a single market? Definitely yes. I mean, we have discussions and exchanges of views with regulators and legislators, and we provide our thoughts on how this can be done. However, from our perspective, this actually comes from the old world, where each jurisdiction had its own structure.

And now there is a discussion about the 28th regime, right? It's already underway at the European level, so we may get a version of it. There is a lot of debate around this. And, hmm, I think this could be a pilot mode for DLT 2.0 in that sense, right that sense, right ?

So that we actually overcome this, because MiCA had a huge advantage by simply saying, "Okay, we define this at the European level European level ." Right? And then, um, we need to get the securities at one stage. Absolutely. So, once we start with the legal formalities, the next step in this full lifecycle is what we want to move to, which is the issue of issuing and minting tokens.

So once this legal basis is established, the asset should become a token. So that's our token for today's discussion. And this is where technology and law meet, intertwine, and intersect. So, Nico, I would like to invite you here from DZ Bank. You and KFW completed this digital bond issue where the entire lifecycle from liquidity need to final settlement took about 1 hour on the blockchain compared to the usual 5 days.

What has changed the most about your role in this process? For example, did the bond issue eliminate work for you and your team? Yes, that's a very good question. Hmm, what's changed the most in my role as syndicate manager is probably that over the time we've rolled this out, we've developed this, I've become more of a project manager. Hmm, but yeah, let's quickly review what, what, what, we did.

So, we developed a product that we call a smart smart bond contract, which is, um, more or less modular, technology agnostic, um, uh, yes, uh, practically, uh yes, uh, practically, uh , a flow or, um, code that you can implement, and which is, um, 100% based on smart contracts, and which actually, um, manages the issuance cycle of, um, a bond from start to finish. So, as you mentioned, from, um, I'm highlighting liquidity needs until the bond matures. So, the important thing is that it's just code, it's not a platform. You interact through the frontend, but, um, that's, um, yeah, not the platform you need to integrate with need to integrate with . You just need to run the code on your side.

So, um, as you mentioned, we were able to execute, um, a legally binding bond transaction with KFW earlier. And, um, we did it completely automatically, um, and we had DVP, um, using the Bundesbank trigger solution. So, in the end, we managed to settle this against wholesale CBDC trading. And this was made possible because we implemented several smart contracts that interact seamlessly with each other. And, yes, we practically organized every step of the process.

And so, it really, really, really increased our efficiency not only on the front office side, but also, especially, I have to say, on the back say, on the back office side, because it, yeah, really, eliminates all the really, eliminates all the , uh, manual copy- copy- pasting, emails, trails. But everything happens automatically, hmm, which is also due to the fact that we have implemented a single source of information based on the ICMA bond data taxonomy, and from this single source of information all, uh, issue data is taken. So, we were able to, yes, practically, uh, automate every automate every , every process. And so, having done that, we have, um, a minimum, uh, hand- made, um, and we can do it in 1 hour, uh, which is legally binding for a wholesale CBDC. So, can you cut it down to 30 minutes?

Is it regulation that is holding you back, or is it a technological problem? Um, yes, that's, uh, certainly possible. Uh certainly possible. Uh , I mean, there was, uh, there was one part where we interacted with the trigger solution, uh trigger solution, uh , U2A. If we did this A2A, we could cut it down to, I don't know, about 10-15 minutes.

And that is certainly possible. If, if I may interject may interject , even though we didn't do this particular transaction particular transaction , DZ Bank and SWIAT worked together on the Siemens transaction in the ECB trials where we did H A, and I remember we scheduled a call with all the participants involved, uh, for an hour, and 20 minutes later we closed the call because it had just gone, uh, with all the different organizations and actors. So these are the first transactions, and I imagine the scalability after that and the efficiency we can get from that is huge. Yes, of course. And that brings me to the next point for the entire panel.

Um, you know, if tokenized markets are to be taken from pilots to scale , what common standards will be needed, for example, for data, messaging, token formats, and how privacy and AML KYC needs should be handled without undermining interoperability. Maybe a little Katie? Yes, I will gladly accept. You know, I think that to achieve institutional implementation at scale, compatibility is important. And that's why having standards is critically important.

These standards cover a variety of means. Perhaps four that can be referenced are compliance standards. So, AML, KYC, compliance requirements , OFAC checks, things of that nature that can actually move with the asset itself. The second is data and messaging standards. So, you know, a common way of having a common language for how we communicate throughout the lifecycle of events.

The third one is, hmm, I'll think about it here. Token standards. That is, how the token itself behaves. And how it can be transmitted, all these different reasons. The fourth, and I think the most important, and I'm very happy to see this issue develop, is identification standards.

So really, all institutions need to have a more common way for investors to store and transfer assets in the future. Any other points regarding standards, yes, of course. So, as mentioned earlier, we also believe that standards are one of the prerequisites for implementation in wholesale capital markets because it's just the language we communicate with each other. So, we believe that data standards are extremely important. That's why we're working closely with ICMA on their bond data taxonomy to develop it further.

And we also believe that protocol standards are extremely important to ensure interoperability. Yes. Okay, maybe let's move on to the technology and infrastructure side. Look, as another technology provider or, for example, a bank, or as an asset manager, we all have to interact together, right? And interact with legacy systems of traditional assets, you know, banks and asset managers.

But how well can today's token infrastructure integrate with existing legacy systems, and what really needs to change? Well, I would say the thing is that technology is evolving faster than the surrounding, um, infrastructure. And so, you know, the way we work, um, it's really a hybrid model today, where tokenized assets have to interact, um, with traditional environments. So, tokenized funds have to use, you know, traditional fund accounting, reporting, um, reconciliation, compliance with traditional systems traditional systems . So, I think one way to overcome this is to have lots of interconnected applications based on APIs and also middleware .

Hmm, I think that, you know, the three interconnected areas that really need to be developed, uh, to further develop this convergence, is, uh, the product itself. So, these new investment vehicles, uh, tokenized funds and tokenized, uh, fiat alternatives, uh, infrastructure, meaning everything from fund operations to investment management functions, uh, and, uh , third, is, uh, customer experience and distribution. Uh, this is a critical component because the way investors access tokenized funds is fundamentally changing. So to achieve this, things like a more modular architecture modular architecture , common standards, like we just discussed, are really important to achieve greater interoperability. Thank you.

And I think that sets me up as a perfect transition to the next part of this tokenization journey, which is about primary distribution. So, you know, our token is now minted and it still has to find investors. Uh, let's discuss how these assets are actually placed. Um, so Kathleen, I'm going to talk a little bit about that now to talk a little bit about that now . As I mentioned earlier, Invesco has taken over management of the, um, Superstate tokenized treasury fund.

But Superstate continues to manage the issuance of tokens as well as settlements on the network. Why collaborate instead of building this entire production and distribution infrastructure on your own? And what does this tell the market about how a large tier-one asset manager sees distribution at scale? So, you know, I think that, um, capital markets have always evolved through specialization. So, asset managers manage assets, um, custodians safeguard assets, um, trading platforms, they facilitate trade, or exchanges, rather, facilitate trade.

Um facilitate trade. Um , and, you know, technology providers create the infrastructure. And so, thinking about our go-to-market at Invesco, where digital assets are a strategic priority, we wanted to partner with the best infrastructure providers like Superstate to help them collaborate on product creation and do what we do best, which is investment management, product management, risk oversight, to really bring the best of both worlds into the products that we provide to clients. Yes, of course. And maybe turning to you, Nico, D Z Bank, in traditional SSA bonds, you know, your syndication department traditionally does bookbuilding, distribution, pricing, you know, basically the full life cycle.

How many actually survive when a bond goes digital? For example, how much is actually automated through the use of smart contracts? Yes, that's a very good question. Ultimately, as you said, syndicated transactions are something special because of the number of parties involved in the process, because of the complexity of the process itself. So what we've done and what we've seen is that, seen is that, first of all, the technology, and also the concept of the smart smart bond contract, is putting all the effort into more individual transactions, more private placement-like transactions, because that's where issuers are showing the market what prices they're interested in issuing bonds at.

These are usually frequent issuers. They issue bonds issue bonds , say, through the EMTN program, so automation is a little easier to do because once the transaction is done, all the details are already in place. You release them through the program. You don't have to do all this legal stuff before and after. So once that's done, it can be truly automated.

To briefly answer your question, firstly, it will really affect further processes. So, everything that happens after execution is a middle and back- middle and back- office task. In the syndicated landscape, we don't see technology taking over the mountain yet, but we are working on and implementing multi-pronged concepts . So, I think it's just a matter of time in the end matter of time in the end . Hmm.

Okay, thank you. And maybe I can ask you one question, Miguel. And maybe the rest of the panel will share your perspective. Where do we actually see in the real world what I call PMF or product market fit today? Is it by asset class of this tokenized asset?

Is it by type of investor, or is it by geography? I think we see the greatest investment fit, I think we see where there are isolations. Hmm, so we're talking about standards, compatibility, and distribution. When I talk about broad distribution, I think it means that I can hold the asset with hold the asset with any custodian I want that Invesco has issued. And that means every custodian should be able to touch it.

Right? Touch it physically, economically, right? So give you access, economic access to the asset, but then when we talk about tokenized assets, also give you access to the functionality. I think that's something we're going to delve into. And we're not where we are yet.

I think we've mostly reached the stage where assets are simple. Or when there is such a large institution that it is possible to perform all the functions necessary to provide for the participants from that institution, right? So, I think that closed stores are, in our opinion, suitable for the product market, as well as for very simple assets, when we talk about, for example, the secondary market for cryptocurrencies. But maybe if you add in there, that is, those cases that we see quickly, yeah, in our tokenization and project and so on, that's where we, uh, easily reach critical mass. Okay, so there you have few parties in the transaction, that is, use case activity, etc.

For example, uh, registered bonds, right? This is a very small, simple use case. This isn't a use case that's going to scale, uh, worldwide for everyone, but it's a very good starting point. And what we see everywhere is, um, a discussion about what the potential is, what we can get from tokenization and so on, and all the talk about potential, instead of just starting with the use cases that you have at hand. So, it's a great starting point to learn, collect, build, um, and then we see that these smaller use cases, if you then start mixing those critical masses with other use cases, you can suddenly scale up.

But there is no way to go directly to the scalable, for example, collateral market that we have today. You have to build this one up. So I completely agree that you have smaller structures you have smaller structures , fewer dependencies, but still enough participants who want to act independently. It's... And maybe just from an asset class perspective, I think what we've found is that the most product market fit is cash management products in a tokenized format.

So, out of the 38.39 billion tokenized volume in the world, about 15.16 billion is in cash management products. Um, but we're seeing a lot of innovation in tokenized offerings in the private market as well as, um, exchange-traded products. And it's really exciting to see all this innovation, especially in the last aspect over the last year.

Um, thank you. This is super interesting and wonderful. As for the time today, moving on, I would like to move on to the next stage, which is actually a kind of glue layer, a bonding layer, which is storage. So, you know, our token is issued, it's deployed, we've found someone to store it securely to store it securely , and that's a regulatory requirement. So, Miguel, I would like to address you.

What is the difference between holding a tokenized asset and a crypto asset today, such as Bitcoin? Is the difference technological, is it legal, or is it both ? And where do you see the biggest gap or even potential, um, in terms of storage that supports the entire lifecycle of a digital asset? So, the cryptography is similar, but the asset is completely different. This is a completely different economic, completely different legal, and also completely different functional component.

So, what I want from a bond is to be able to transfer it, right? Quite right. This is what we have with MiCA This is what we have with MiCA , this is what is relevant to crypto assets in general. But I also want it to maybe trigger a coupon payment. Now we get to what it means to be a security, right?

And if I want to give my client access to this functionality, that access should be similar to the access I would give someone, or some other custodian would give to this functionality. And we're just not there yet. I think we're trying to agree on how to move assets, right? I think this is the first step. I think we can learn a lot from MiCA in this regard.

The ultimate goal is to offer full access to the security as it is, right? We want to have these digital objects that we can interact with. We want to move them quickly and provide a seamless experience for the investor, right? And this is where storage becomes two things. It becomes, um, a level of access, but it's a very nuanced level of access, um, in a sense that it's also a level of access that will be available not only to the investor, but also to the issuer.

These are the same opportunities. For, um, anyone involved, for the transfer agent, for the settlement agent , all of these functions will require access to the asset, and it will typically be at the same level as storage. So, it's very, very far, um, it's very multifaceted in that respect. And I think we can definitely start with the security that Mika asset storage gives us, right? Because it's a bare asset, and we focus a lot on what will happen in the worst case scenario.

But then, at the level of how to access it, that's where we need to start communicating with each other so that these lessons learned from DVP that we have can actually, you know, um, be transferred elsewhere, and and, and , and, and it's going to be beneficial for everyone. Yes, of course. Hmm, I had about 10 more questions on this , but I think in terms of time, um, I want to move on to the fact that probably, while every step we've taken so far has a maturity, there's also the fact that it's still in its infancy, right? What is the opera we are talking about in terms of compatibility, scale, market access. But, I think one of the biggest issues we have is around secondary markets.

And this was also mentioned about three or four times in the previous panel discussion, trade, calculations. You know, let's say, uh, we issued our token, we structured it, we placed it, we escrow it with Miguel. But now we need to trade the asset. Um, I see that this is where the biggest gap in the market is in terms of market maturity. So I'm going to open this up for discussion.

What is the biggest unsolved problem in secondary trading and settlement of digital assets today? And what needs to be done in terms of getting that liquidity, getting everyone involved? Well, I would say it's a liquid market in that sense, because you need assets that can be allowed and suitable for trading in those markets and marketplaces, right? So, this is where we come back to the original regulatory chain problem that we have. And yes, and to the framework we are dealing with we are dealing with .

And then, in addition to that, of course, a critical mass of participants, right? We are seeing a lot of organizations now trying to get started. They say, “Well, let’s even realize that the full path of a tokenized asset is possible. We know we already have the market-grade infrastructure for this, but participants are simply not ready to use it yet because they want to wait because they want to wait . For example, some are starting, and the few who are starting are already starting to build critical mass.

They also need tokenized assets that are eligible for trading. Technologically, all of these assets can be easily traded on the market, but of course there is a regulatory framework that covers this. So, these two aspects create a liquid market. And that's what we're creating now. I mean, there are already over 50 financial institutions in the ecosystem.

It is wide, and, for example, it joins even more to the adjustable first level. So we bring these players together to scale and build these markets. But, as I mentioned before, the point is to start. We know that the full path is possible. Don't keep us waiting...

potential that will be fully realized. We can start now to achieve just that. Yes. Thank you. No, that's great.

Er, er, yes. I would , I would reiterate the regulatory point, to be honest, because our experience in the digital bonds that we've issued so far is that because we don't have a regulatory playing field, uh, between digital bonds and traditional bonds, ultimately, because of the same issue because of the same issue as the lack of ECB compliance, the lack of HQLA compliance, the investor interest is not as high, the issuances are smaller, so it's almost like a tandem. But, but I think the regulatory point is the most important one, combined with what we discussed earlier, which is the data and protocol standard, probably. Thank you, Miguel. So, I think you've touched on the most important points, I would like to have a very specific wish, which is, I would like us to move to OTC custody in Mica so that we can have these benefits for tokenized assets as well.

So I think access is very difficult right now because, uh, exchanges... Secondary markets are organized around a single storage model. So, you will have to adhere to the risk profile of this exchange to be able to participate. And I think that's going to be a very big hurdle if we don't solve it at the storage level. Uh, so we can actually start trading these tokenized assets.

Perfectly. Kathleen? Yeah, I think maybe just to add to everything that's been said. Uh, maybe double-click on what Jonathan said. We need more institutional participants to increase liquidity in the blockchain.

And that's really only going to happen because of what Miguel was talking about in terms of access, and really making it as seamless as possible for institutional investors, abstracting away any complexities in the blockchain and also the infrastructure that might exist to operate and interact. Perfectly. And I think that brings us to, uh brings us to, uh , the last question, uh, rapid fire. We always have basically a perspective, uh, panel discussion question, but if we look 12 months from now, based on all the current steps, we're talking about the full lifecycle of a digital asset. What do you think?

Which step will look the most different in 12 months? Where will the biggest changes take place? Someone? I would say in the area of distribution. I think it's a really exciting development , with traditional institutions embracing new blockchain-based wealth management platforms, new distribution platforms coming to market, and it's really critical to enabling greater scalability of the ecosystem as a whole.

I think we expect the biggest changes in the currency pair. I think it will look very different in 12 months. I would say it's almost the same. The money stake is the most important. If we have wholesale CBDCs, tokenized deposits, and stablecoins, then we will have much more flexibility in wholesale capital markets, as we always have.

Yes, the monetary pariah is certainly a big piece of the puzzle, and we can already see today that it will be solved in 12 months because we know that Pontus, the central bank monetary solution, will go live this year. So, I think over the next 12 months, financial institutions will get used to how to use it properly and how to set it up. And we're also seeing this in our own app right now. There is a huge amount of work on projects on what to do, how to set it up. For example, the Austrian CSD is even now doing a project with us on how to go digital, how to also go digital, and how to make this interconnected world interconnected.

So interconnected. So , I think with a proper DVP setup, where we've solved the money side of things, we'll also see that distribution becomes a lot easier because, um, the only thing left is for market participants to join. And maybe just add to that that once the monetary part is resolved, it will mean there will be more digital money on the blockchain. Once there is more digital money on the blockchain, you will be doing this more. This is where the demand for tokenized products comes in.

I think this is a great ending point for today. Um, first of all, I'd like to thank you, Kathleen, Miguel, Nico, and Jonathan, for all your thoughts today. I hope you, the audience, gained some great ideas and insights into where the market is today, where it needs to go tomorrow, and in the next 12 years. months. And I would like to thank you, the audience.

So, a big round of applause for the audience and for the panelists today as well. Thank you today as well. Thank you .