Blockchain, and in particular tokenisation, is a potential game-changer in the financing and trading of unlisted securities. Blockchain technology can make transactions simpler, more straightforward and faster. It can be used across asset classes, including environmentally sustainable assets such as shares or bonds issued by a solar energy generation company.
Tokenisation involves the conversion of the rights to an asset (equity, bonds, real estate, etc.) into a digital token. In the blockchain ecosystem, the information and value in a token can be efficiently and securely transferred, stored and verified.
To understand the potential of tokenisation, bear in mind that buying a financial asset (e.g., shares or a bond) today involves several processes, so delivery versus payment (DvP) can take up to four business days, depending on the type of asset.
By contrast, tokenisation could make the DvP process easier and faster. Assets can be transferred 24/7; it also allows for fractionalised assets. 1 That creates the potential for better liquidity and easier trading. In addition, a range of ‘new’ asset types can be accessed.
Tokenisation makes it possible to structure the data relating to an asset – be it project, financial or environmental, social and governance (ESG) data – in a unique data source and thus standardise and ease the various due diligence processes (technical, financial, ESG and legal).
Filling the gap
To put tokenisation to a ‘real life’ test, we recently invested for the first time in a tokenised bond issued to refinance a small solar energy project sponsored by French sustainable energy solutions company EDF ENR.
Financial market investors often deem these types of projects as too small and specific to be pursued. Indeed, such projects often fall through the funding gap – they are too big to be financed individually via retail banks, and too small to interest corporate investors looking to fund a limited number of big-ticket operations.
By streamlining the due diligence process, tokenisation is a potential solution for closing this gap, as it should lower the threshold to finance such projects, making them more open to being funded by issuing bonds or other financial instruments.
A game-changer in a growth market
With solar–based electricity production set to double by 2025 in the European Union, and almost half of the multi-billion euro financing related to small projects, we believe tokenisation could bring significant business opportunities for our clients.
More broadly speaking, Boston Consulting Group and other industry watchers estimate that the total tokenised market across all asset classes could reach 10% of global GDP – some USD 16 trillion – by 2030.
For us as an asset manager, the potential benefits of tokenisation to clients extend beyond it offering new business opportunities. While traditional asset trading systems can display the same type of data, full transparency is inherent to blockchain technology and tokenisation since the data is directly embedded within a token.
This transparency can provide clients with far greater granularity in investment reports and in verifying the ESG impact of the investment. For example, the tokenised bond from the test case has embedded within it the GPS coordinates of the financed solar panels, making it easy to localise the investment.
Regulation is fast becoming more stringent when it comes to disclosing, assessing and reporting on ESG impacts, for example:
- The Markets in Financial Instruments Directive (MiFID) already requires investors to define their sustainable development preferences
- The Sustainable Finance Disclosure Regulation (SFDR) will be applicable from 1 January 2023
- The Corporate Sustainability Reporting Directive (CSRD) will reinforce ESG reporting requirements starting from 2024.
We believe that tokenisation – in particular, the granularity of the information embedded within the tokens – can be a highly effective solution to meet these new requirements.
Three firsts in one trade
Our solar panel company tokenised bond investment in July 2022 was structured by BNP Paribas Corporate & Investment Bank’s AssetFoundry Platform, with BNP Paribas Security Services managing the custody aspects of the transaction.
This trade was the first of its kind, in three ways:
- Multi-team cooperation: The project involved the Private Debt and Real Assets (PDRA) team acting as portfolio manager together with almost all support teams: Digital, Compliance, Legal, Operations, Operational Engineering, RISK, IT, Finance and Data. The project and its main milestones were run in coordination with the French regulator, Autorité des Marchés Financiers (AMF).
- Term sheet data and ESG data included within an Ethereum token. All the data included in the token is freely accessible on Blockchain explorers such as Etherscan.
- First test of token reversibility in France: The tokenised bond was seamlessly switched back to a traditional bond within 48 hours. This was a crucial element for integration with traditional trading systems and is also part of our recovery plans given that Blockchain is still an early-stage technology.
Also read the media release on our tokenised bond