Tokenisation's Potential for Financial Inclusion

Financial inclusion has long been highlighted as a key benefit stemming from the development of the blockchain world. And tokenization is a key component to this, as it allows for the fractionalization of assets, which of course enables more retail investors to get on board. But could this element of financial inclusion be improved? We know that fractionalization can open up assets that were previously inaccessible to investors, but is that enough?

Besides fractionalization, what more could be done to further open things up and enhance inclusion?

I think fractionalization is just one small piece of a larger message around access. The truth is that a lot of individuals today just don't have the same kind of access in financial markets that, quite frankly, rich people do. And people say, "Hey, where are the tokenized assets?" There are a lot of them out there, obviously. We've got all kinds of cryptocurrencies, NFTs etc, and that world is expanding rapidly and scaling like we've never seen an asset class before. My issue has always been that, as interesting as the technology and this idea of tokenization is, these tokens backed by real assets (shares in companies, real estate, etc) are still few and far between.

How does opening up the markets in this way apply to even bonds? What advantages does that offer from a retail and institutional market perspective?

When it comes to bonds, a lot of demand that we're seeing in areas like ESG, for example, is actually driven by individuals and by retail investors. This is a demand-driven revolution. People are saying, "I do want to make good investments, but I also want to do good for the world. "And institutions are forced to respond to that overwhelming wave of demand. Even in our corner of the world, in Malaysia, things like Islamic finance, sukuks, are a very important part of what people want to invest into. Again though, it is a very closed and limited access market. I think that individuals should have the right to deploy capital to the asset classes where they want to invest, especially when these are quite frankly probably safer investments. Things like bonds or sukuks that give you that fixed rate of return at a much lower risk.‍

The market for sukuk Islamic bonds is huge. How about the potential for those to be tokenized?

Malaysia is a country that dominates the world in terms of volume and dollar value of sukuk issuances. And yet most of that is priced in ringgit, a local currency. Not really accessible to foreign investors, and certainly not accessible to retail investors. It's really a very institutional market. You've got issuers who want to issue sukuks, and you've got kind of long only investment funds and pension funds who buy into them. And that all works, but it means that the individual doesn't have a chance to access directly that market. And I think they should, because sukuks, as a market, are interesting because the default rate is phenomenally low.

What are sukuk Islamic bonds and what is that opportunity?

Sukuks as an instrument, at their core, almost by definition, require that element of financial inclusion, or at least alignment. If I invest into a project, I need to be aligned with the project and to have interest in the outcome of the project. As opposed to debt investors who, mayor may not care about the success of a company, but just want to make sure they get their coupon payment.