PAUL MCBETH: More than just a token consultation

Paul McBeth is the editor of The Bottom Line and Curious News, and previously worked at BusinessDesk for 15 years.

The Financial Markets Authority adopted a decidedly New Zealand tone of understatement in pronouncing the nation risks falling behind the rest of the world when it comes to tokenisation.

Because we already have.

The New York Stock Exchange and Nasdaq are working on ways to introduce tokenised offerings to open the door to a 24/7 trading window a la what we see in cryptocurrency markets, while trading platforms such as Robinhood have launched digital products to their ever-expanding client bases, and even Wall Street’s elites like JPMorgan Chase are dabbling with tokenised funds.

Not that we should be disparaging of the market watchdog for undertaking the consultation on all things relating to blockchain technology – the infrastructure underpinning the wild and wacky world of digital assets.

For the uninitiated, tokenisation is essentially taking a real-world asset and making a digital mirror image of it, where the ownership of the actual thing can move more freely on the blockchain.

Think of it like when we started shifting those paper documents to online spreadsheets and word processors, and then remove the middlemen as the distributed ledger technology takes care of those jobs that used to be done by legion secretaries and assistants.

I never wanted anything from you

You might well ask what’s the issue we’re trying to solve here.

After all, what’s so novel about changing what’s essentially an administrative function?

One of the big things is about accelerating the time for transactions to settle.

Just think about the excruciating waits we’ve all gone through as our banking system has faffed about in getting lenders’ systems to talk to each other and facilitate real time payments.

Or listen to any shareholder bemoan the two-day settlement period we go through in purchasing company stock – potentially missing the record date when a dividend is paid or rights issue comes through.

Struck from a great height

Little wonder people have looked at the real-time settlement in crypto markets with green eyes, and thought, why not us?

Especially given Australia’s bungled upgrade to its clearing and settlement system put the NZX under the pump for any of its own plans to shorten that settlement time.

And there are nifty little other features that got people pondering, such as cutting up illiquid assets into fractional offerings in the way Sharesies unlocked wide share ownership domestically, or embedding specific qualities into a token that represent the different rights attached to variable classes of an asset – say a non-voting share that comes with a preferential dividend for instance.

The headline responses to the consultation largely consisted of pointing at regulatory uncertainty as holding back the adoption and experimentation of virtual assets, with various laws piling on the red tape that makes it hard for a poor entrepreneur to know where to start.

Run fast for your mother

The FMA’s starting point is to advise the government on how existing law affects tokenised products and services and what can be done to clear a bit of air for them to breathe, and to work with industry players on just what might make things a little easier for everyone without undermining those hard-fought-for consumer protections that are at the heart of the watchdog’s every movement.

That’s all well and good, but we’ve all seen the too-good-to-be-true crypto scams loitering in the not-so-dark recesses of our social media feeds and as Cygnus Law’s Simon Papa rather strident submission points out, Bitcoin and the blockchain technology enabling the world’s favourite cryptocurrency have been around for more than 15 years. Another worthy consultation and various papers for the minister shuffle are hardly going to set the world on fire.

Which is something of a worry for regulator that claims to take a risk-based, outcomes-focused approach. Investor appetite for cryptocurrencies and their ilk shows no sign of abating in these volatile times, with Sharesies adding crypto to its stock of products available and the FMA’s 2024 consumer confidence survey showing growing ownership of those products.

And while it’s fine for the regulator to be talking to the big end of town and assorted interested parties keen on protecting their respective patches in the world of financial services and products, we’d do well to question what the appetite actually is among people to push for digital twinning of assets in New Zealand.

The dog days are over

Yes, we’ve seen Propopoly test the waters with small-scale regulated retail offering selling shares of a small property development that are stapled to a digital token, so as to allow trading in a closed secondary market after the FMA cleared the way for the platform to facilitate trades without needing a licence.

That’s a great example of the light-handed regulatory approach we want to see with novel technologies and opportunities.

Because while it’s easy to understand why entrenched organisations are reluctant to push too fast in embracing new technology that might make their existing infrastructure redundant, that’s exactly where the entrepreneurs are meant to leap – just ask Easy Crypto about the potential payoff for those who dare: the cryptocurrency exchange sold to Swyftfx last year for a cool A$33 million in cash and scrip.

Much is made of the ambiguity around whether particular tokens would qualify as financial products, but it’s those grey areas where the daring tend to thrive as they push harder and faster into new territory, walking away with the glories of victory or some hard-earned lessons in defeat.

Image from Hitesh Choudhary on Unsplash.