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Missing piece in tokenizing property: the developers

It might take more than clever ideas to get Asian developers to tokenize their prime properties…like a crash.

Leo Lo, Fonto

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One of the most exciting prospects for digital finance today is the tokenization of illiquid assets such as real estate. A variety of firms are attempting to bring this model to Asia, by focusing on the benefits to the investors. But what’s in it for the property developers?

Leo Lo, owner of Fonto, a Hong Kong-based real-estate surveyor and financier, says he is looking at building a blockchain-based platform for tokenizing real estate – in Singapore, where the regulations are better.

But in addition to regulation, he says the problem is that property developers don’t seem convinced that tokenizing a portion of a development is worth it. It’s unlikely, he says, that any prime property will be tokenized unless there’s a sharp market downturn that leaves developers hungry for cash.

In the meantime, the emphasis will have to be on more basic, less sexy projects such as getting properties documented on a blockchain. Lo has a stake in a company that has worked with Bank of China and ASTRI, a Hong Kong government-backed institute, to put mortgages on a distributed ledger.

“Securitization and STO [securities token offerings] are the second stage,” he said. “Institutional investors need to see titles on the blockchain first.”

Other firms in Asia are working on exchanges and market makers for real-estate DSOs. But Lo says this won’t be enough. “You’ll still need a real-estate developer that’s got credibility to give tokens a good reputation.”

American start

The first DSOs for real estate exist. Last year, Templum Markets, a fintech with a U.S. broker-dealer license, issued tokens representing stakes in the St. Regis resort in Aspen, Colorado. A few others have followed.

Likewise, plenty of money has been raised to cater to SDOs: by security-token issuance platforms like Polymath (based in Barbados); by companies offering STO services, like Coinbase and Bakkt (both in the U.S.), and by security token trading platforms, such as tZero (U.S.), Gibraltar Blockchain Exchange and Templum.

The action has mostly been in the U.S. because, DigFinhas been told, the authorities’ early call that almost all tokens are securities (as opposed to utilities) forced startups to come up with business models that would be regulated. The rest of the world, by implication, will soon catch up.

We’re looking to solve problems that are real in our business

Julian Kwan, InvestaCrowd

If that’s true, the rest of the world is taking its time. Asia, in particular, is lagging, despite the well-known fondness for real estate among the region’s investors. What’s the holdup?

According to Security Token Group, which has identified $500 million of funds investing in the real-estate STO industry (as of March 19), there are no Asia-based firms receiving funds. No security-token issuance platform, no security-token trading platform, and no other token-related infrastructure companies have been included in the company’s list. Among companies offering STO services, only Hong Kong-based BnktotheFuture has been funded – but that was via a $30 million initial coin offering, from back when crypto-enthusiasts were willing to back ICOs.

Singapore story

There are, of course, Asia-based players working on the tokenization of real estate (and other assets). But the lack of big-time funding suggests there’s more to the story than just a late start.

Singapore-based InvestaCrowd is among the most prominent companies trying to create the infrastructure for SDOs. It crowdfunds investment into properties around the world, letting smaller investors get the chance to invest in private assets otherwise open just to private-equity or other institutional investors.

Its co-founder and CEO, Julian Kwan, says the experience has shown how much more efficient crowdfunding could be if it focused on digital assets rather than paper-based ones. Therefore it is building an exchange.

“We’re looking to solve problems that are real in our business,” he said, speaking at an industry talk in Hong Kong.

What DSOs do

These problems include the lack of liquidity and secondary markets; administrative costs; friction in settling deals; cumbersome lock-in periods (a typical real-estate private-equity fund lasts from five to 10 years); a combative relationship with developers once the money’s been booked. PE funds, in the meantime, enjoy the carry on the money invested in their pooled funds.

Thomas Zaccagnino, founder and CEO of Boston-based Muirfield Investment Partners, is working with InvestaCrowd to identify tokenizable projects. His firm invests in opportunistic (high return) property deals, but he wants to escape reliance on long lockups, which, he says, “forces private equity to think short term, so we become lenders, not investors.”

Incumbents are rich and slow to change

Leo Lo, Fonto

The need to deliver high internal rates of return (a metric P.E. funds use for investments) can distort portfolios by forcing managers to sell the best assets first. A digital alternative, by providing investors with secondary-market liquidity, would let them invest more based on the fundamental attractiveness of a property, as securities investors do.

That means the underlying quality of the property is going to paramount. “No token will save a bad security offering,” Kwan said.

It also means DSOs have to be priced attractively against publicly listed real-estate investment trusts. There are already Reits in Singapore, Hong Kong, Japan and Australia, giving retail and institutional investors equity-like exposure to property.

“Any DSO has to offer multiple times the return of a publicly listed Reit, or it’s a waste of time,” Kwan said. That means it must offer returns more like what a private-equity fund expects, rather than a public equities investor.

Zaccagnino’s firm specializes in turning dilapidated buildings into trendy workspaces and other high-return turnaround deals. It could be Asia needs this kind of project to jumpstart a DSO market.

Developers duck

This ties back to the question of supply, which seems to be the missing equation in the argument for DSOs in Asia. Pleasing investors is one thing; but what’s in it for the developers?

Leo Lo of Fonto thinks it’s worth trying to develop a DSO business that’s based in Singapore, because of its better regulation, but using assets from Hong Kong or mainland China.

Even so, he says it’s difficult to get developers to experiment in alternate financing around a prestige property. “Incumbents are rich, and slow to change,” Lo said. “They’re happy with the traditional way of doing things. They can easily sell and lease their prime properties. Look at the residential sector: there’s always a queue to buy new flats.”

Finfabrik, a fintech in Hong Kong, had one such project last year but insiders say the developer it was working with decided to drop the scheme.

The risk, Lo says, is that the first Asian DSOs won’t be attractive projects, as developers will only agree to tokenize low-quality properties.

But he is optimistic that tokenization will happen, because it provides liquidity to both investors and developers. Echoing Zaccagnino, he thinks DSOs can improve the margins on developing out-of-favor sites. It’s just a question of how long – and whether we need a property bust in Hong Kong to make it happen.

Capital Markets

What Citi Ventures’s incubator seeks in Asia

Victor Alexiev, the regional lead at D10X, talks about the technologies transforming institutional business.

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Victor Alexiev, D10X

Victor Alexiev is Singapore-based Asia-Pacific lead for Discover 10X (D10X), the new product incubation arm of Citi Ventures. He joined in 2018 and now covers incubation, programs and strategic partnerships for Citi’s institutional clients group.

D10X launched in the U.S. in 2016 to foster innovation from within the bank, encouraging lean-startup thinking as well as coordinating third-party build, buy or partnership decisions with other parts of the bank and its clients.

The following is a transcript of an interview with DigFin, which has been edited for style and conciseness.

DigFin: What kind of innovative models are you trying to develop?

Victor Alexiev: In Asia, it’s about new products and new services in the ICG [institutional] part of the franchise, so the projects we work on are mainly B2B and B2B2C. We’re not just looking internally. We also try to partner with technology companies as we find pain points they address.

What kind of business models are you looking for in this region?

Finding solutions for Citi’s markets, commercial and investment bank business.

Why not for the consumer side, which is such a big part of Citi’s P&L?

We do have D10X in our consumer business for North America, but not in Asia, at least not at this stage. In Asia, consumer fintech and quite fragmented and competitive, and my personal view is that you will need to put in a lot more resources in order to achieve meaningful results.

Is innovation within a huge bank, particularly if you’re focused on B2B – is that an oxymoron?

Yeah, a lot of people think that innovation with corporations is too slow. It’s true in part, as we have to go through a lot of compliance, sourcing and H.R. checks. But we’re looking after companies and people’s money. But once you identify a product fit, you scale much faster. I’m here to build something meaningful within a large institution that has a global footprint.

Within B2B, what kind of ideas are you looking at?

Most projects are new models of customer engagement. Our most public project that was built and rolled out via D10X is Proxymity, an end-to-end proxy voting platform offered to custodians, that directly connects issuers and investors in real time.

Customer engagement sounds very, um, consumery.

A lot of corporate and institutional business platforms for banks is clunky. Or it’s based on business models that just seek to skim basis points by processing large volumes. What will next-generation banking look like? What happens if banks become platforms for others to create value? What do direct-to-consumer models look like for our transaction or investment banking?

So even at the corporate level, you need better customer engagement.

That’s right. For example, an increasing number of clients want to consume our products via an API instead of calling our salespeople. We’ll still need salespeople but we have to be realistic that our evolving client expectations demand a different experience.

What does engagement mean? Can you give me an example?

We’re finding, for example, that buy-side clients are less interested in reading a full research report. But they’re very interested in parsing the underlying data that made that report. Decisions are becoming more quant-driven, so we don’t need to offer as many products. It’s about helping our clients make data-driven decisions and providing them with data-driven products

Is that just a matter of better product design?

No, it means we need to transform the entire organization, to be an end-to-end digital driver – “customer engagement” can’t be just about our front office. “Digital” is about culture and people.

I often hear about banks changing their culture, changing the ways they do business, the mindset – yet the rhetoric doesn’t describe the reality. At best it’s a partial change.

There’s an increasing urgency within banks in general. Margins are thinning, and there is a realization, or a willingness, to transform. We’re trying to speed up the process by providing examples of what “good” looks like.

Where have you implemented new solutions so far in Asia?

Initially we rolled these out in our markets and securities services business. We focused on custody, securities services, equities, and foreign exchange. Gradually we’re bringing new technologies to spread products, corporate banking, investment banking and transaction banking. 

And within those divisions, what parts of Citi are you focused on? Operational efficiencies?

Efficiency is important but lots of departments are already looking at this. I also see at other banks a lot of innovation labs doing proof-of-concepts that may not reflect the actual business needs. The projects I work on all have separate, independent P&Ls, and are focused on client-centered new value creation.

You had mentioned client engagement at the institutional level. What are your clients asking help with?

Long-only funds want data to help them with things like modeling ESG portfolios (for environmental, social and governance standards). More short-term trading clients want data-centered models to take faster data-driven decisions.

We explore questions like what do next-generation pension funds look like? What about insurance? How do we support sovereign funds in managing impact-oriented portfolios?

You’re not big on blockchain consortiums and such?

We are, if it meets business needs. We participated in Komgo, a blockchain consortium for documentation in letters of credit that finance commodities trades.

What are the particular technologies that you’re trying to adopt?

Machine learning, APIs and blockchain are the three deep, transformative domains. For these to flourish requires a bigger internal transformation, a broader regulatory understanding of them, and a cultural mindset change.

That’s a lot. Any anecdotes you can give, to make that a little more concrete?

We’re about to publish with ASIFMA a white paper on STOs [securities token offerings] exploring what it would take to make these go mainstream. Our takeaway was interoperability. A fintech can issue a real-estate token, say, in their local jurisdiction, operating under the same local regulation for securities or property. But how do you open that to international investors, or institutional investors, or create a global marketing capability? The complexity quickly goes up. The same goes for, say, using A.I. with certain clients for real-time pricing and execution of F.X. or overnight collateral. What does that mean, how could it change the market? We’re exploring use cases, doing experiments – to do it right, we have to get out of the lab.

Are you finding lots of B2B technology companies in Asia who fit into these needs?

There are few startups that are enterprise-ready, globally scalable and that could deal with our clients. They need to be either close to the customers – meaning they already have insight, client integration of lots of data – or have differentiated tech that it is scalable, high performance, and can help banks solve specific problems.

But I’m bullish on tech in Asia. We’re seeing the dawn of Asian tech: the technology itself is maturing as companies shift from copy-and-paste to developing more core tech. And we’ve seen more B2B fintech move from trying to compete with us to partner with us.

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Capital Markets

Hope for handling corporate actions?

The industry is shifting from evolutionary fixes to transformational change.

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Photo: Markus Spiske on Unsplashed

DigFin moderated a webcast last week on the topic of using new tech to handle the thorny old problem of processing corporate actions. Mention “corporate actions” and you mostly have ops and tech people at financial institutions reaching for aspirin, or something stronger.

Corporate actions are anything a publicly traded company does that impacts its securities, debt or equity. Even straightforward things like a stock split come in all different flavors. There’s no one cone to hold all this ice cream. Banks, brokers, fund managers, and trading venues have invested zillions into processing transactions, but corporate actions is always “the poor cousin”, as Dean Chisholm, Hong Kong-based COO for Asia Pacific at Invesco, put it during the webcast. And because of the complexity, vendor solutions have been too expensive.

Mention ‘corporate actions’ and you have ops and tech people reaching for aspirin, or something stronger

But the industry can’t ignore corporate actions. Alan Jones, Singapore-based head of business development for Asia at SmartStream Technologies, pointed out that corporate actions today represent the highest point of risk to operations. As firms look to scale their businesses – with new markets, new products to handle, and an ever-increasing variety of actions to handle – they need to deal with this final barrier to straight-through processing. Do that, they can then begin to add value, like analytics on top that can give investment firms, for example, a view as to how good a job their service providers are doing.

The good news is that technology is evolving to the point that automating corporate actions is looking possible. The biggest enabler is cloud computing. Cloud isn’t just about saving on cost, noted David Fodor, Sydney-based head of business development for financial services at AWS. It’s about scalability and flexibility. Moving to cloud computing is the precursor to handling the vast amounts of data required to come to grips with something like corporate actions.

There’s no one cone to hold all this ice cream

Cloud is just a starting point, though. One challenge is that corporate actions involves many players, said Satyan Patel, senior VP for global client development at Hong Kong Exchange. Stock markets like HKEX connect to depositories, custodian banks, securities brokers, data vendors and investment firms. And then you have the issuers themselves, whose announcements are often in the form of unstructured data (like text on a PDF). The good news is that, beyond firms’ own IT spend, the finance industry is gradually adopting new standards, like ISO 20022 for messaging. That will help reduce the amount of unstructured data.

However that still leaves a lot of data of questionable integrity out there, which defies manual processing. Francis Breackevelt, chief operations head for Asia at BNY Mellon, in Singapore, said the full range of new technology needs to be brought to the fore. Whereas for years, transaction processing was an evolutionary process, he thinks the industry is at a point of major change. From simple robotics to natural-language processing and other forms of artificial intelligence, firms are on the cusp of tackling the variety of corporate announcements. They are looking at distributed-ledger technology to enable industry-wide processing.

Corporate actions processing isn’t going to be solved like flipping a switch. It requires a critical mass of industry player involvement, guidance from regulators, confidence in the data, greater adoption of enabling tech like cloud, and successful implementation of A.I. Then all of that needs to be implemented to the extent great enough to bring processing costs down, a lot. But fintech is making possible the goal of automating corporate actions in a way that until now has been just a dream.

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Capital Markets

Stablecoin weighs Anchor for investing in economic growth

“Everything has a unit of value, except money,” says Anchor founder Daniel Popa.

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Anchor AG, a financial services company, is about to launch a dual-token stablecoin that is intended to give investors exposure to economic growth removed from the vagaries of currencies and commodities.

The company is calling for currency traders, hedge fund managers, and private investors to test its Anchor coin in advance of its inaugural listing on Japan’s digital exchange, Liquid, in September.

Anchor is domiciled in Zug, Switzerland. Its founder and CEO, Daniel Popa, is a serial entrepreneur who was born in Romania under its Communist regime but was raised in the U.S.

Most stablecoins are mapped to gold or a fiat currency,” he told DigFin. “But currencies are all depreciating, whether it’s due to monetary policy, quantitative easing, inflation, whatever. It doesn’t matter how you peg a currency when the U.S. dollar has lost 50% of value over the past 30 years [to gold] and 98% over the last century.”

Reimagining stablecoins

A relative latecomer to bitcoin, he wondered how a stablecoin could be created that would bypass inflation altogether. Other business interests kept him from commercializing his ideas until 2018 when he devoted his efforts fulltime to what became Anchor.

The company has developed a proprietary algorithm that generates an index that Popa describes as “non-flationary”, denominated in “monetary measurement unit”, or MMU, whose value is derived from many inputs.

Like another project in the making, Facebook’s Libra, Anchor’s algorithm uses inputs from leading world currencies and major bond-market yields. But unlike Libra, Anchor’s most important input is GDP movements from 190 countries, using data sourced from institutions or companies such as the World Bank and Bloomberg. “This gives it intrinsic stability,” Popa said, in contrast to other stablecoins.

It’s really telling you the value of the dollar or the yen, without any government influence

Daniel Popa, Anchor

The index data tracks back 25 years to when Eastern European countries ditched Communism and joined the liberal world. Since then, global growth in real terms (adjusted for inflation) has been 0.4% to 0.5%, on a 25-year average (or around 2.5% per annum in notional terms). Popa says Anchor’s value is tied to this absolute economic growth, instead of the vagaries of fiat currencies or commodities (whose value also vary over time against the dollar, making them unpredictable).

Anchor versus Dock

Anchor’s value will have to be managed actively. The company’s plan is a dual-currency launch. First is the Anchor coin itself, which Popa describes as a “payments token”, built on the Ethereum blockchain. The plan is to issue 700 million tokens on Liquid, with MMU currently trading at about 79 U.S. cents to one Anchor; the company is aiming to raise a total of around $600 million.

This money will go to seeding a fund that will invest in currencies and bonds to stabilize the Anchor token (ANCT), as will any returns on investment. As those investments gain in value over time, they will support an increase in value of Anchor tokens. The fund will be actively managed by Anchor to cover market events.

One of the vulnerabilities of stablecoins is that they can be broken in severe market conditions. Anchor is therefore launching a second Dock Token, which Popa describes as a “utility token”. ANCT is the main payments or currency token, while DOCT is utility token used systematically to buy or sell ANCT to maintain its price to MMUs. DOCT’s algorithm is built to provide incentives to ANCT users to contract or expand the supply of ANCT.

Dock Tokens are not tradable on exchanges, but serve as the gateway to access Anchor Tokens: upon purchasing DOCT, users automatically agree to its terms and conditions that build in this rebalancing mechanism, in return for benefits such as discounts when new ANCT is being minted.

“The Anchor token gives you a financial anchor in choppy waters,” Popa said. “When there’s a storm, we ask users to Dock their boat, and we burn the excess tokens in what we call a contraction phase. In other periods we ask users to expand the market.” He says this is just one of several tactics devised to maintain the stability of ANCT.

Measuring money

Popa declined to detail how the company defines a payments token or a utility token, saying he didn’t want to be drawn on legal issues. The company’s legal team is confident the firm is in compliance with Swiss regulations, and it will seek licenses in other jurisdictions where necessary. One of the company’s goals is to expand to other markets, with Asia a priority.

Popa, who has founded and run large-scale businesses before, wants to see the company grow quickly. It now counts 30 developers on staff, based around the world, a number he hopes will rise to 200 over the next 24 months. The priority is to grow the stablecoin and its ecosystem, with more traders using the associated Anchor app. This by itself won’t generate much in the way of revenues, but a critical mass of users would enable Anchor to launch financial services on its wallet (similar to how Libra would offer credit and other services via its Calibra app).

Popa says he hopes Libra also gets off the ground, which has many structural similarities but is fundamentally valued on fiat currencies. “The more participants, the sooner we get mass adoption of cryptocurrencies and stablecoins,” he said, adding that he expects other big corporations to enter the fray.

If the project gains currency (ba-dum-dum) then its biggest risk would be that global growth slows down. Against a backdrop of buffers against further exploitation of natural resources, climate change, and aging demographics in the world’s leading economies, is Popa worried about this?

He says no, noting that for decades growth has been constant. Even in 2008, when most countries fell into recession, aggregate business growth grew year-on-year. Moreover, he says, a momentary fall in growth would be smoothed over by the algorithm’s cumulative calculations of growth since the 1990s.

What excites him the most is how this calculation can be used. The firm’s website has a simulator measuring MMU against 19 fiat currencies plus bitcoin and Tether, going back to 2012. “It’s really telling you the value of the dollar or the yen, without any influence by a government,” Popa said.

He says the purpose of MMU is not a stablecoin per se, but to serve as a unit of monetary measurement. “Everything has a measure of unit value,” he said, noting physical phenomena such as distance, volume, pressure and so on. This endows these categories with predictability and stability.

“Everything has a unit of value, except money,” Popa said. The challenge he faces is that money is a social phenomenon, subject to human agreements rather than physical or mathematical laws of nature. Has digital finance changed that?

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Missing piece in tokenizing property: the developers