Corporate Finance soundbite: Mergerspresso

Simon Wood 

Hello and welcome back to Mergerspresso. Today we're tackling a word that gets thrown around a lot in finance circles right now, tokenization. And in particular, the tokenization of real world assets. I'm Simon Wood and joined by one of my AG partners, Stephen Fishbourne, who's our tokenization guru. Stephen, you live and breathe this stuff. So, if you can, and in one breath, what is it?

Stephen Fishbourne 

Thanks for having me on, Simon. So, imagine a bond or a share or even a slice of a building. Normally, who owns it is recorded in a private spreadsheet operated by a bank, a government, or another intermediary. Tokenization is about instead recording that ownership as a digital token, which is simply a piece of computer code, which lives on a shared or decentralized ledger, one that everybody involved can see and trust.

Simon Wood 

So it's basically a new record-keeping system, not a new kind of asset.

Stephen Fishbourne 

Yes, that's the idea. So this is not about crypto assets like Bitcoin, for example, which have no intrinsic value and are not backed by anything. A tokenized bond is still fundamentally a bond. It has the same rights and broadly the same rules, although these are being hammered out as the market develops. Think of it more like swapping a paper certificate for a smart digital one. 

Simon Wood 

Okay, so if we apply the Mergerspresso, so what test? Why should we bother? What's actually in it for people?

Stephen Fishbourne 

So there are three key opportunities. First, speed. So trades today can take a couple of days to settle. Tokenized versions can settle almost instantly. Secondly, it's programmable. The token can basically enforce its own rules, like automatically paying a coupon on time. And thirdly, it's cheaper, because you cut out a lot of the intermediaries and the manual internal administration. 

Simon Wood

Well that makes perfect sense, sounds brilliant, but I'm assuming there is a catch. So, what is it?

Stephen Fishbourne

Indeed, so this market is still being developed. And three of the key challenges at the moment are firstly, how do you actually pay for this token instantly if the cash side of the transaction still needs to move the old slow way? There are experiments with digital cash options to fix that problem, but they all have difficulties of their own. Secondly, liquidity can be thin, as we're at the early stages of adoption. And lastly, some of the legal ground rules, like what happens if something goes wrong are still being ironed out.

Simon Wood

So okay, I get that it's early days, but what should the people listening to this actually do about it right now?

Stephen Fishbourne 

So I'd recommend looking at this as a commercial and not really a tech issue, and firms shouldn't just leave it to the tech teams. So I'd recommend that Treasury, Legal, Tax, Company Secretariat, and the relevant business units get in a room together and take a hard look at your own pain points and where this technology could help. For example, where does waiting for settlement cost you money today? And it's also worth asking your banks or custodians what they're already building, because some of them are further along than you'd think.

Simon Wood 

Great summary. So it's not like Bitcoin, it's not science fiction, it's just a smarter, faster way of holding the assets we already know and for the most part love.

Stephen Fishbourne 

You got it exactly. And it is definitely a space to watch.

Simon Wood 

Thank you Stephen, thank you for listening everyone. Please look us up on Spotify, Apple or wherever you get your podcasts and we'll see you next time.