Digital technology opens the door to ‘alternative assets’, but what role will banks play?

Banks will still be vaults for what’s considered valuable, but what that is and how it’s measured is up for grabs

PUBLISHED : Sunday, 12 February, 2017, 3:32pm
UPDATED : Sunday, 12 February, 2017, 10:27pm

Investing and trading in alternative assets is likely to become a new area of finance to be transformed by financial technologies, according to analysts. As with many other aspects of digitisation in financial services, the initial stages of the process will have a democratising function, while later stages could see a transformation in how markets work, or even how value is measured.

“I think over time, whatever can be traded can be digitised,” Kathryn Shih, UBS president of Asia Pacific told the South China Morning Post on the sidelines of the bank’s Future of Finance Forum in Hong Kong.

“Lots of assets have been digitised almost unconsciously. Treasury bonds used to be stored in vast warehouses, corporate loans used to be just from a bank to a customer. Now they are digital and can be traded, and there are many more examples of changes I’ve seen in my career,” Shih said.

Trading in alternative assets such as art and antiques, fine wines, classic cars and other collectibles, or precious metals has traditionally been comparatively closed. An investor can buy a Picasso painting for US$45 million, or they cannot. That one buyer makes the market.

However, blockchain technology looks set to change this. The distributed ledger technology behind cryptocurrency bitcoin allows physical assets to have unique identifiers, which means they can be accounted for, and transacted with, on the ledger. In addition, these tokens on the blockchain can also stand for just part of an asset, and that makes them more accessible to a wider audience.

“Asset based tokenisation will make certain investments not only more accessible but also more liquid, allowing more individuals to get exposure to assets like art or real estate which they may not otherwise have,” said Henri Arslanian, PwC’s fintech and regulation technology (regtech) leader for China and Hong Kong.

Then, the next step is that as more objects become linked to the blockchain, the role of currencies as a medium of exchange may become threatened.

“Blockchain tokens unleash the virtual value of physical objects; a gram of gold sitting safely in a vault can now be used to purchase movie tickets, collateralise a loan, or even be traded for carbon credits,” said Jehan Chu, managing partner at Jen Advisors, a blockchain venture capital fund, and former art advisor.

“Want to trade your spare computer power for a Mangrove tree? You can do that. Want to trade an hour of your time for a song download? You can do that too,” he added.

These changes are coming more quickly than ever and in her opening address at the forum, Shih descibed the “exponential growth in digital channels and new algorithms and technologies that enable the digitisation of assets”.

As with almost all aspects of financial technology, the digitisation of alternative assets brings with it risks for banks.

Want to trade your spare computer power for a Mangrove tree? You can do that. Want to trade an hour of your time for a song download? You can do that too
Jehan Chu, managing partner at Jen Advisors

“We also need to be cognizant of how investing digitally in alternative assets could affect the value chain for banks, how this space should be regulated, and where challenges lie,” Shih said.

PwC’s Arslanian however, still sees banks playing a role in this new environment.

“There is an opportunity for banks to position themselves as the trusted vault or wallet for the digital assets that investors will be increasingly holding in the future,” he said.

With more and more being digitised, the potential for banks as a digital vault may expand beyond simply assets, or their digital representation.

“Identities are also becoming digitised, and over time it seems likely that we will digitise more and more of our identity,” said Shih. “Individuals will want to be sure about what they digitise, what they share and that it is stored in a secure place, and that might also be a role for banks,” she said.

“You trust a bank to hold your gold bars... so why not your digital identity?”