Given the increased demand for visual and audio content, we produce a series of videos each week. Based on the number of views, the link below was the most downloaded video this week.
The size of the on-line gaming market estimated $152.1 billion of revenue p.a. in 2019. Gamers in developing countries can potentially sell Virtual Assets /Digital Assets to wealthy citizens in the West for cash. Could this be a way to help the 1.7 billion unbanked earn digital currencies? If on-line game creators tokenised their virtual assets, then players in less developed countries could sell these tokens to players of the same on-line games in Western markets. Thus, passing economic value from one set of gamers to another, while reducing the need to use banks or other parties, who in some cases levy exorbitant costs to make payments! World of Warcraft, Fortnite and EverQuest all claim they have millions of players each around the globe. The virtual assets’ market p.a. is valued anywhere between $250 million and $900 million. Interestingly, eBay has decided to ban the sale of these virtual assets in its marketplace. “The seller [of digitally delivered goods] must be the owner of the underlying intellectual property or authorised to distribute it by the intellectual property owner.”
Tangible results from using Blockchain technology
One of the common questions TeamBlockchain is asked is: “Show me an example of where using Blockchain technology is actually implemented and the tangible results that have been seen”. The immediate reply is, “Just google whatever industry you work in, or are interested in, and we think you will be surprised at the results you find!”
While doing some research this week Komgo stood out as a good case study for which to answer the above question. Komogo claims it can reduce the time to issue a digital letter of credit by 99.58%, from 10 days to 1 hour! Komogo was established in 2018, by 15 of the world’s biggest banks, creating a commodity trade finance platform using Blockchain technology. In 2019, over $700m of financing by network members was processed. Reuters reports that a single commodities cargo by sea can require 36 original documents, 240 copies, and the involvement of as many as 27 parties. Predominately paper-based analogue processes cause shipments to take weeks, if not months, to complete.
Walmart is another example of how Blockchain technology is being used to track shrimps from India, as well as various green-leaved products (such as lettuce and cabbages) from farms to its shelves. Given the success of using Blockchain technology in its supply chains, Walmart announced at the end of 2019 that it will now be using the technology to improve the efficiency of its supply chains in 400+ stores across Canada, which will include 70 different transport firms.
This is one of the reasons that Digital Bytes is sent out weekly, to give readers a selection of verifiable sets of case studies of how Blockchain technology is being deployed, the impact it is having, and what the implications may mean in different jurisdictions and business sectors. We know that increasingly society is looking for a ‘sound bite’; there is less and less written content on the web and more and more video content, which ought to be of no surprise. It is reported that 85% of businesses use video as a marketing tool.
But what about the future? Is the market for Blockchain technology just a niche one for the ‘techies’? Well, Gartner predicts: “Blockchain’s business value-add will grow to slightly over US$360 billion by 2026 globally, then surge to more than US$3.1 trillion by 2030”.
Why have we not seen more tokenisation of assets?
“If you build it, they will come”
Initially, people thought that if only you could offer a digital share class on an existing asset, such as a property portfolio or indeed an individual property (and allowed this new digital share class to be traded on an exchange 24/7), investors would come flocking. However, similar to the quote from Kevin Costner in ‘The Field of Dreams’ things are not always as you think, as the quote was actually: “If you build it, he will come”. Indeed, to date, there have been relatively few Security Token Offers (STOs) or, as some call them, the digital share classes of asset-backed securities.
For asset managers who have the responsibility to manage and look after others’ assets i.e. pension fund managers, banks and other asset managers, four services really need to be in place before they, themselves, are able to really embrace Digital Assets – banking, custody, exchanges and insurance. These services are now being addressed and, more importantly, governments and regulators are looking to introduce legislation to clarify how Digital Assets are to be treated. For example, the Swiss Stock Exchange is changing the law so that multinational companies such as Novartis and Nestle will be able to have a digital version of their shares to be traded on its digital exchange, Six.
Interestingly, the Organisation for Economic Co-operation and Development (OCED) recently issued a presentation titled ‘The Tokenisation of Assets and Potential Implications for Financial Markets’. It posed a similar question to the heading above, in relation to the adoption of Digital Assets – “If it’s so good why has it not taken off already?” – and specifically identified:
• Custody services – to be able to link assets off-line eg equities, bonds, funds etc with online; its digital representation on-line.
• Digital currencies – the need for a trusted, potentially central bank-issued stable coin to allow initial payments to be made efficiently using a Blockchain and ongoing income from equity dividends, coupons from bonds, rent from real estate etc.
• Appreciation of the costs savings – institutions need to understand the tangible compliance and increased profits for their firms if they are to use Digital Assets. While reports from the likes of HSBC, which claims efficiency gains of up to 10x by issuing bonds using Blockchain technology, more studies and analysis of the real cost reductions are required.
• Niche use cases are likely to be earlier adaptors – such as the issue equity for private companies, for specialist Private Equity, Venture Capital, Infrastructure, Institutional Real Estate funds or the issuance of small to medium-sized bonds. A vast amount of capital is locked away in private hands. A McKinsey report found that the value of assets held in private equity funds has jumped more than 700% since 2002; twice the growth in global, publicly-traded equities. Tokenisation is one possible way to unlock this capital and offer exposure of the asset class to other investors.
• Prioritise the back office and removal of intermediaries – once the technology is being used to reduce risks and compliment compliance controls and a more robust understanding of the infrastructure that is required, there is likely to be greater demand to issue more Digital Assets.
There are a number of institutions exploring the challenges and opportunities that Digital Assets offer, and we are going to see more being issued in 2020. Fidelity (one of the world’s largest asset managers) claims, “We envision a future where all types of assets are issued natively on Blockchains or represented in a tokenized format”. While Fidelity is more vocal than most, many of the large law firms (certainly across Europe and in the City of London) are currently working on a range of Digital Assets proposals. There are publicly quoted companies that do not want to be the first to launch a Digital Asset, but they would like to be a very close second!! They believe ‘the direction of travel’ is tokenisation, but are just not sure when.
Christian Dreyer, CEO CFA Institute Switzerland “The big talk of town is securities tokenization, of course – or moving the aforementioned securities value chain on the (or a) blockchain. This is largely a matter of back-office logistics, but the operating model implications would be monumental”.
Could this mean we will look back on 2020 as being an inflection point for the wider adoption of Digital Assets, resulting in lower issuance costs, stronger compliance and better more relevant risk controls? After all, our lives are becoming ever more digitised, so why should the financial services sector be any different?
Blockchain technology in the retail sector
Increasingly, customers are wanting to know where the clothes they buy come from and, given the rise of fake news and increased cynicism, these customers often want proof of provenance. There have been stories of global brands using ‘sweat-shops’. Indeed, Google, lists a number of very well-known high street names such as Adidas, Nike, Abercrombie Fitch, Tommy Hilfiger and H&M, to name but a few. However, by using Blockchain technology it would seem that manufacturers, brand owners, retailers and customers can have more reassurance as to the provenance of the goods they are handling and buying. Therefore, hopefully trust in supply chains and the items being purchased can be rebuilt.
If we study the steps involved from manufacturing to garments being bought in a shop or on-line, we can see there are potentially seven different steps of the supply chain – all potentially vulnerable for unscrupulous participants taking advantage and substituting the correct materials and items for ‘fakes’.
- Brand owners place an order – relevant information such as type of fabric to be used, colour range, selection of sizes needed, amount of material required, patterns, designs to be used, when the items are needed and for which markets, and details of the actual item including zips, buttons accessories etc. are all information which could be stored on a Blockchain-powered platform and shared with the manufacturer, so they know what has to be produced, for which country and when.
- Order is sent to manufacturer – sharing the relevant materials needed with the approved suppliers and using Smart Contracts, the brand owner could automatically be informed of what has been ordered by which manufacturer, as well as being told when the supplier will be able to supply the goods. This would initiate a history of each item from the raw material suppliers, ensuring these suppliers were using sustainable sources and also including the labour conditions that their workers are exposed to.
- The orders are sent to the supplier – again, a Smart Contract could send quotes for materials and copies of any relevant factory inspection checks to the manufacturer and potentially the brand owner. This would create transparency in pricing and other matters, thus allowing the brand owners ‘hands-on’ real-time information about their supply chain.
- Items are manufactured – a transport company delivers the materials scanning a QR code once they have confirmed the authenticity of the packed goods. The manufacturer makes the product attaching the QR code with it (which contains the details like raw materials used, the supplier’s information, the origin of production, manufacturing date and procedure and quality standards). This enables the quality control to create a verifiable audit, all of which is entered on a Blockchain. Creating an immutable record which is tamperproof and can be timestamped, gives the brand owner and, if required, the final buyer, access to the manufacturing quality assurance details in a highly transparently fashion.
- Brand owner, or its logistic firm, receives the goods – the goods are signed for, having been checked that what has been received was what had been ordered. Smart Contracts then inform the logistics company what products have to be sent to which retailers. At the same time, Smart Contracts can authorise payment for the received goods (potentially all this without human intervention) making the whole process more efficient and faster. As the price of Internet of Thing (IoT) devices falls and using other sensors it will be possible to track raw materials and finished items as they are transported globally, allowing retailers and brand others real-time data so improving the efficiency of supply chains further.
- Retailer sells the goods – the retailer is able to inform the brand of the items that are selling well, potentially triggering the manufacturing of additional items. There is no reason why, as goods are sold, the brand owners cannot not be paid their % of the sale using a digital currency trigger, off a Smart Contract. All the accounts could be made available online, in real-time, allowing local sales taxes e.g. VAT to be paid to HMRC.
- The customer has transparency – by using a QR code which customers can scan on their mobile phone, access can be given to a host of data about the items being bought, so building trust and potentially enabling the brand owner and retailer to charge more.
So, the advantages of a Blockchain-powered platform are many. Blockchain clearly offers greater transparency, plus provenance, thus building trust across the whole supply chain. It has the potential to speed up payments and reduce the inefficiency of those same goods being entered into multiple accounting systems that need checking and verifying. This ought to lead to cost savings too.
Blockchain also offers the promise of reducing delays and disputes, preventing orders from getting ‘stuck’ in the supply chain and thus enabling automatic and faster reordering to meet the demand for fast-selling items. The chances of lost or misplaced goods ought to be minimised as they can be tracked in real-time. The good news is Blockchain-powered platforms are being used as opposed to being simply theoretical. Indeed, London-based fashion designer, Martine Jarlgaard, has been using Blockchain technology since 2017 as part of its supply chains. While multinational organisations are using the likes of IBM, we are seeing smaller, nimbler providers (such as Vixidoz,) offering, in effect, ‘off the shelf’ solutions at a low initial price for those looking to start the process of digitising their supply chains.
All of the above has focused on using Blockchain technology essentially for supply chains, but there are many more ways that it can be used. Digitising loyalty schemes and enabling different schemes to interact with each other means rewards in one shop can be used buying another brand’s range of merchandise. LVMH has launched a Blockchain-powered platform to both help cut fraud of luxury goods, as well as help, reduce fake goods being bought in the second-hand market. Meanwhile, a company called Loomia has a range of ‘smart clothes’ which can be linked to a Blockchain. Data can be collected to see how often a garment of clothing is worn, therefore potentially rewarding the person wearing the item with tokens.
There will, no doubt, be many more applications in the retail and fashion industry to use Blockchain technology as industries simply stop talking about the technology and embrace it as part of the growing trend to become more digitised in our modern society.
Real progress in real estate – the future is here!
Guest Byte: Tim Carswell (https://www.linkedin.com/in/tim-carswell-b6948013/) CEO of Token 360, advising on the tokenisation of assets and digital securities.
For some time now there’s been a lot of chatter about how blockchain-based transactions and the use of digital financial instruments such as Security Token Offers (STOs) would impact on the commercial real estate (CRE) sector, in particular on how real estate assets are traded and financed.
According to a 2016 Savills World Research Report, real estate is the largest asset class in the world, valued then at $228 trillion and representing approximately 60% of all the world’s assets. However, the Savills’ report estimates that only 34% of global real estate is readily investible at scale with the rest not being accessible to public investors. Real estate based STOs, sometimes referred to as digital securities backed by a property asset, enable the ‘democratisation’ of real estate as well as making dealings between property professionals and institutions more efficient and cheaper. The flexibility of STOs potentially allows them to be structured to represent a variety of ownership and economic interests in the asset such as equity in the owning company, an interest in debt secured by real estate, a right to an income stream based on cash flows or an interest in capital growth of a development project.
Until recently the number of completed CRE transactions involving STOs was small, due mainly to the regulatory framework still being developed. However, that landscape is changing as the financial regulators in countries such as the UK, Germany, Switzerland and the US have authorised businesses, that are fundamentally technology companies, to operate blockchain-based platforms to issue and manage digital securities.
In mid-2019 there was some initial activity in Germany when the regulator, BaFin, approved digital securities and several large property companies issued real estate bonds to raise development finance including the Fundament Group’s €250m asset-backed security token.
Then in October 2019 a UK based real estate investment company, Alliance Investments, announced that it was planning to tokenise over £500m of real estate projects in the UK using STOs and that its first project would involve tokenising £20m of the value of River Plaza, a 180 unit luxury residential development in Manchester.
The River Plaza project was led by the US digital security issuance platform tZero and included development finance involving the London based Globacap which is an FCA regulated capital markets platform for digital security administration, arranging/issuance and custody.
Moving on apace, a milestone transaction in the tokenisation of the international CRE sector has just been announced. BrickMark, a German real estate investment company, has agreed to purchase a stake in a high-profile commercial property on Zurich’s Bahnhofstrasse for over €130m with a large part of the price being paid using a digital token called BrickMark which is based on the Ethereum blockchain’s ERC 20 protocol. Fundamental to the transaction was the willingness of the vendor, a Swiss real estate investment group, RFR Holding, (RFR) to be paid in a digital token as it demonstrates their confidence in the stability and future value of the BrickMark digital token as a financial instrument. Interestingly, RFR, known for purchasing the Chrysler Building in 2019, is reported to oversee over $13 billion of real estate and is a significant player in property in Europe and the USA. So how long will it be before we see other real estate managers and owners becoming engaged with STOs?
Taken as a whole, these transactions, and others that are taking place under the radar, indicate that sophisticated real estate professionals across the CRE spectrum have confidence in digital securities as a basis for significant and long-term property transactions. It would appear they have confidence in the reliability of the underlying blockchain to properly execute the ‘smart contracts’ that underpin the transactions and, most importantly, they believe in the long-term viability of the digital securities as a ‘currency’ that will be regarded as a solid store of value and a tradeable commodity within the international CRE community and potentially other investors.
In the UK, a number of digital security platforms are now authorised by the Financial Conduct Authority to issue digital securities via capital markets and/or on their own platforms and to provide a suite of custody and administration services, including Mozaic Markets, LDX and Globacap.
One of the implications of the digitisation of real estate is that we are likely to see smaller investors gaining access to this asset class. Historically, the majority of commercial real estate has been held by institutional investors, due to the high value of the individual properties, and they tend to be longer-term holders as opposed to traders. However, if smaller investors have access to real estate will this mean that we see more liquidity and trading as these smaller investors buy and sell their digital interest? If this is the case, could this lead to governments being able to earn additional income from stamp duty and capital gains tax? May we then see governments encouraging the digitisation of real estate as it could create more revenue for them as well as encouraging overseas investors to buy assets in their jurisdiction?
The future is nowhere! 2020 will see a great deal more real estate transactions based on digital securities. That growth will be driven by an increasing number of regulated issuing platforms in major financial centres and growing confidence within the international CRE and investment communities in using digital securities as a safe, flexible and cost-effective way of doing business in real estate.