Maurice:

Welcome to another edition of C&F Talks, where I get to speak to a speaker at one of our forthcoming events. Today, it's my great pleasure to have with me Grace Wyatt, who's a Partner at Addleshaw Goddard. And Grace is going to be speaking at the Digital Assets Innovation Summit, which is part of City Week and is being held on the 2nd of July at the Royal Garden Hotel, London. Grace, welcome.

Thank you.

Great to have you with us. Let's turn to our first question.

From a legal standpoint, which real-world asset classes are currently best suited for tokenisation? And what's driving adoption in these sectors?

Thanks for that, Maurice. I think that's a really interesting question. And I think I'd be quite inclined to turn that around.

I think certainly where we are right now is that the legal framework is flexible enough to allow anything to be tokenised. And I think that's a really interesting question that we spend a lot of our time thinking about at the moment. And it's, what is tokenisation?

And does it change the legal nature of the asset that's underlying? I think there's a couple of key distinctions to be thinking about is that there's two types of tokenisation that we can be thinking about. There's the totally native solution. So, by that, I mean something that doesn't have like a real-world twin.

And then we have essentially tokenisation whereby you're essentially parcelling up a real-world asset and just recording those parcelments on a blockchain. So, I think that's the use case that we see much more frequently at the moment. And we see that for all kinds of use cases. I see that for gold; I see that for oil. There's some really interesting examples out there. I think we're seeing it in things like shipping. We're seeing promissory notes that are now digitally native.

Obviously, we're starting to see things like DIGIT from the Bank of England. So that'll be gilts that will be totally digitally native. I think in terms of what's driving it, I think it's the type of tokenisation that solves real world problems seems to be the thing that is driving tokenisation and how we're seeing that evolve. I think for certain things that are particularly out of reach for a consumer, so something like a fine art, you could potentially in a very small fraction via a tokenisation of that overall picture.

I think it's also giving more democratic access to things that your average person has not had access to. I'm also seeing things like a tokenisation of in ground mining assets, which is really interesting, because that's actually the piece of the mining overall picture that's the most valuable part. And obviously, as a consumer, I didn't have any access to those types of assets. So, I think that's really interesting.

And if you look at the shipping use case, obviously, that very much has not changed in a long time. And there are kind of particular practical pinch points. So being able to do things like having an on-chain permissory node solves a couple of real key practical problems. And I think the other key thing about the blockchain is that it's very transparent. So, it's not one person that gets to control the content. It's also impossible to go back and to alter. So, it does actually have some really significant benefits when you look at the practical use case.

Yeah.

I mean, we hear a lot about the benefits of tokenisation, efficiency, transparency, fractional ownership, and so on. But what are some of the legal and operational challenges that clients face when trying to implement tokenisation?

I think the biggest challenge at the moment has been a lack of certainty. I think certainly in the UK, we've been in a situation where this has been happening. And I think there's certainly an argument that some pieces of the crypto ecosystem and the market are very mature.

I think certainly crypto in terms of overall global adoption, if you look at the size of that market, it's significant. But I think we've been in a place where no one's been very sure about the rules of the road in the UK. And I think that's definitely been holding a lot of potential entrants back because not knowing what the rules of the road are, how do I proceed in terms of offering something?

And then I think the other side of that is the risk for the person accepting the tokenised whatever it is you've decided to tokenise is that without that legal certainty in that framework, it's really hard to get a handle on where does the risk sit here? What happens if this all falls over? What am I left holding?

So, I think, and again, risk, I think is something in this space that has been a real focus quite understandably. I think certain key market events like the fall of FTX really drained confidence out of this space. And I think it's something that had a real impact.

I think the other piece that kind of attaches to that, which is closely correlated is obviously reputational risk. I think there's been a certain amount of unwillingness to enter into this arena because of the perceived reputational risk. And I think that has been definitely something that's been holding things back.

I think the other big question is interoperability. I think people aren't quite sure how it all fits in yet and how the overall ecosystem looks and what the knock-on impacts are. And I think that will come. I think at the moment we're at a point where the key jigsaw pieces are starting to be in the right place.

I mean, yes.

You partly answered the next question I wanted to really ask you, which is, how are the institution investors and financial services firms responding to tokenisation? I think from what you're saying that there's a degree, perhaps, of hesitancy because of the risk. But are you seeing real uptake in areas like private markets, real estate and funds?

I think that's a great question. I think it's hard to get an... I have lots of conversations with firms who are very interested.

And I think it's hard to know where we are in terms of that cycle. Are they at the very beginning in terms of dipping a toe? Or is there something that firms are really thinking, look, in the next six months I want to have done, why?

I'm certainly seeing in, for example, private funds, I've seen a couple of fund structures that are tokenised. So, I think we've seen that. We're seeing tokenised private funds.

I think we're also seeing funds which contain digital assets as well. So, I think that's also happening. I think real estate comes with certain practical challenges.

And I think certainly in a more institutional investor space, I think we do start to see that, particularly in the GCC. And we're seeing that a lot more in the Gulf than I think I'm certainly aware of in the UK market. But don't quote me on that, I might not have the answer for the UK.

So, I think that the challenges for the institutional players at the moment have been the lack of certainty. And I really think that's been a really big feature in holding this back. And as I said, I think we haven't quite got a full view of what the impact is.

So certainly, I think a lot of the conversations I have in the institutional space are around capital treatment. I think there is a real emerging understanding of how this fits into the WICA ecosystem for firms and what this might mean in practice. And I think the other hesitancy is custody.

It's how you hold something in this totally different way. And obviously, that is a totally different approach. I think there is definitely some appetite for exploring, but I think we're very much at the beginning, certainly my impression.

Yeah, yeah, I suppose that's right. I mean, there are custody providers out there who are specialists in this area. So, some of that sort of infrastructure, financial infrastructure is beginning to get in place.

But another key area, of course, is regulation. And what role do you think regulation is playing in enabling or limiting the use of tokenisation in the UK and internationally? And are we seeing progress in building legal certainty for tokenised assets?

As a regulatory lawyer, I would very much start from the position that I think legal certainty and the role of regulation is critical. I think, certainly when we're thinking about institutional investors and institutional firms, that they are highly regulated. They have their own very significant regulatory obligations.

And I think any investment that doesn't fit within those rails is always going to be problematic. So, I think the starting point simply has to be we all know how these are treated from a legal perspective. I think the challenge has been that certain bits of the globe have done this very differently.

I think the EU has gone a very different direction, which has been interesting. I think the US we’re still really waiting to see where they land. Obviously, their first stab at legislation hasn't gone through.

I think from a UK perspective, it's really helpful that we do have some certainty at law that a crypto asset, for example, can be a third thing. It's a distinct type of property. And I think even though it's challenging conceptually, we now know that's the position at law.

There's an emerging body of case law, which I think is really supportive. And I'd say the other key piece that is really important in terms of how the regulatory picture fits together is the need for transparency. I think part of the challenge in this market is that it isn't necessarily subject to the same rules of the road of traditional finance.

And there has been a lack of, I think transparency is probably the right word, but in terms of understanding of what's really happening under the bonnet, and I think that can feed a bit of hesitancy in terms of what you're actually getting. I think the other key piece is that it's obviously, the financial markets are so interconnected. I think stability is a really big risk.

So clearly having certainty around what happens when the wheels come off, again, I think is a really important piece in terms of helping this progress.

Yeah. So, the picture you're building is of a nascent industry that's building and growing and dealing with the issues.

But looking ahead, what tokenisation case studies do you believe will have the most commercial impact in the next two to three years? And what needs to happen to accelerate adoption?

It's interesting, isn't it? Because I think crypto in particular, and the way this is evolving isn't necessarily the way I think we would have ordinarily expected this to go. I mean, certainly Bitcoin, you still can't walk into any form of supermarket and actually use it to pay for things.

So, I think in terms of the underlying intent of what cryptocurrency was intended to do, I think we haven't got there. I think what I'm really interested to see develop is the use case for payment rails for things like Stablecoin. And I think that for me has always been one of the most potentially, I don't know how best to word this, but really significant impact.

Because I think the thing about Stablecoin is that the cross-border payment utility in particular, that's another key pinch point for the global ecosystem. And the ability to send funds almost free cross-border instantly with no effects risk is enormous. Obviously, that is not something that happens in isolation, there's infrastructure either side, and those bits are still a bit challenging.

But I think the piece that I find really compelling and potential, not sort of commercial, not consumer facing, but more kind of business use case of payment. So, for example, if we all know that time taken to be paid for goods and services in the UK is a significant lag on our economy. I think SMEs in particular really struggle with liquidity because there's that delay between delivery of goods and actually payment.

If you could eliminate that gap, and if you could have instant payments when you hand over goods and that all happens automatically, that could be revolutionary. So, I think I'm very interested to see where the payments use case goes and develops. I think we're all very used to the trading use cases.

And I think I'd be interested to see what a digital payments lag could unlock in the wider market for settling of a tokenised MMF or thinking ahead to things like DIGIT. If DIGIT isn't matched by a digital payment lag, you wonder a little bit, what have we even achieved? So, for me, it's about solving particular pinch points in the existing ecosystem and whether that could create any new interesting opportunities.

Yeah, as you say, in the payments area in particular, huge applications. Thank you very much for sharing those thoughts.

For our viewers, we'll be debating these and many other points at the Digital Assets Innovation Summit, which is coming up on the 2nd of July as part of City Week. Further details are available at www.cityandfinancial.com.

We have a great lineup of speakers, including Grace and many others at the top regulators from the SEC, CFTC, the FCA, from the Middle East will be present. And we'll be trying to cut through all the fog around these issues to find out what the future holds. So, we very much hope you'll be able to join us.

Grace, thank you so much for sharing those thoughts. We look forward to seeing you at the event.

Thank you for having me.