Edmond Yong, Co-founder of Celebrus Advisory, a bespoke and compliance-first consultancy for blockchain development and business tokenization, shared his thoughts on the process of tokenization and its future in Southeast Asia.
I believe Celebrus is dealing with compliance consultancy for blockchain development and business tokenisation. In line with the theme of our upcoming newsletter, do you mind elaborating on tokenisation?
Tokenisation is a process of replacing sensitive data with non-sensitive data. In the payments industry, it is used to safeguard a card’s PAN by replacing it with a unique string of numbers. The payment token itself is the unique string of numbers – a secure identifier generated from a PAN. Payment tokens are automatically issued in real-time and used online in predefined domains and/or payment environments. With tokenised payments, the PAN is not transmitted during the transaction, making the payment more secure. This is the key strength of tokenisation as a security measure. Since the PAN is never compromised, there is very little possibility that the token can be used for fraudulent activities – even if a data breach occurs and payment tokens are accessed.
What do you think is the likelihood of STOs replacing ICOs?
ICOs are dead. The obituary came in towards the end of last year. ICOs will still have its hallowed place in crypto history, but the industry has evolved. STOs are supposed to be the comeback sequel, but they have been overhyped and are underwhelming, so far at least. There is still a long way to go before STOs can enter the mainstream, and one should not expect STOs to become the same frothy bubble as ICOs.
Do you mind explaining why you think ICOs are dead?
ICOs are basically donations – purchasing ICOs does not give rights to a share in any real asset. You simply trade ICOs then. There was a bubble in ICO prices as it is not backed by any real asset – like the Bitcoin bubble when it was reaching $20,000/coin.
How about STOs, then?
The difference between STOs and ICOs is the presence of real assets as its underlying security. The word security in STOs means that the token represents ownership in a part of a real asset. Theoretically, I could issue STOs of my shirt and sell it to people. So, the buyers of my STO would have partial rights to my shirt. Because of that, it is unlikely to be as speculative as ICOs are, due to its asset-backed nature.
Not entirely. STOs are actually easier to regulate in some ways. Since STOs are by definition securities, they will need to conform to existing securities laws.
In what ways are STOs easier to regulate?
STOs cannot be regulated completely in the same way conventional capital market securities are regulated. This is because regulators have no idea how to regulate STOs completely, as this is a new technology. If regulators over-regulate STOs, the crypto industry will not be happy with this approach and will argue that current laws are too restrictive and stifle innovation. They will lobby for a permissive environment for this technology to take its course.
That’s quite difficult. Having to balance between innovation and regulation is already tricky, but what other aspects of STOs might pose challenges to regulators?
From my observations, most issuers are drawn to STOs because they want shortcuts. That is, they don’t want to go through the whole nine yards of seeking approval and would rather just mint the tokens and place them out directly to investor pools. For now, the one thing that makes this innovation better than an ordinary share is speed-to-market.
Let’s consider a company going for an IPO (Initial Public Offering). The company needs to comply with regulations of the Securities Commission and find investment banks to advise on its valuation and sale of its newly issued shares. These processes take time.
In contrast, if you just issue STOs, you don’t need investment banks. You’d need to conform to some regulatory laws, but that’s about all. You can have your IT team issue tokens to other companies or interested parties.
So, regulators will have to assess whether STOs can really make the capital formation process faster and easier, especially for the underfunded SME community, and find ways to reduce bureaucratic friction.
As for Regtech, STOs will open up whole new directions, like custody and walleting solutions to help store crypto assets; digital identification of the holder and forensics to trace the transaction trail; smart contract integrity and audits so that it cannot be compromised, and so on. You cannot really decouple Fintech and Regtech; both will need to move together for regulators to accept STOs.
Speaking about Regtech, how would Regtech be directed in respect to STOs?
Regtech is a reactionary technology. You see, innovation happens at a quick pace. However, regulation has always been slower than innovation – this is inevitable. When the Internet was introduced to the public, regulators could only use laws related to postal mail and telephone to regulate Internet-based activities. It is pretty hard.
Besides, there are other issues in terms of regulating something with the potential to go global like STOs. Now, let me give a hypothetical scenario. Assume that I’m planning to issue 1,000 tokens for an acre of land I own at Seremban. I can, in theory, sell my tokens to anyone in the whole world. However, for me to issue ownership rights to other people, I’d need to comply with land laws. Land is handled by the state authority, in this case, Negeri Sembilan state government. I’d have to update the status of land ownership to the Negeri Sembilan state government. The buyer would have to check if he or she is allowed to have ownership over my land as per the law.
So, regulation is not standardised, and this is a challenge as well?
Yes. For good reasons. Each country has its laws and Regulations.
That can be quite troublesome. In some things such as accounting and banking standards, there is already a standard the world adheres to. Do you see regulation in Fintech and Regtech becoming standardised?
As per my observation, we are heading towards that in some issues.
While we’re still on the topic of regulation, I’d like to ask about any possible governance issue with STOs and Fintech in general.
Foremost on my mind is AML-CFT (Anti-Money Laundering and Counter-Financing of Terrorism). Crypto may be borderless but securities are not, so AML laws could stunt this. Two things to watch out for: Japan which hosts the coming G20 will share a framework on governing crypto. FATF, of which Malaysia is a member, will also release its much-anticipated guidelines soon.
It is very hard to track tokens and any form of payment done in a blockchain network. Regulators who are concerned about the possibilities of money laundering or terrorism financing would be scratching their heads to investigate the possibilities of dirty money being cleansed through blockchain channels.
Beyond that, there is a whole body of jurisprudence that is almost non-existent for STOs right now. You need new laws and judicial decisions on property, contract, taxation and so on to give the market confidence. If Bitcoin is property, then what is it? How does the tort of conversion apply to intangibles like Bitcoin? Will bankruptcy laws recognise Bitcoin as properties? Are smart contracts validly enforceable, when there are no digital signatures involved in the transfer of assets? What is the evidentiary value of smart contracts and will courts even accept them? Taxation is a confusing mess. Is it classified as income or property? Should you tax this as a new asset class or at the primary activity level? Mining, issuing, and trading are very different animals.
Those are some legitimate issues to which Regtech might be able to offer solutions.
Definitely. People are avoiding ICOs because ICOs are tainted with terms such as being scams and illegitimate. Some people would love to be unregulated. These are the anarchists who want to break out of the system. They do not adhere to the existing system and seek absolute freedom.
However, the majority look forward to regulatory technology, as Regtech would assist regulators in monitoring these technologies, hence allowing them to give the nod and give confidence to the public to engage in these new technologies.
Then, how do you see the growth of STOs in Southeast Asia?
It will not be as exciting as you think. STOs have to conflate two financial worlds, the old and new, and there is bound to be inertia and resistance. Don’t expect a peaceful co-existence at the start. I see more progress in the money services front, for payments and remittances, due to the large unbanked population in Southeast Asia, compared to the capital markets.
The region is diverse and moving on different gears. For examples: Thailand is legalizing STOs, Singapore allows for ‘reverse ICOs’, Bitcoin is being commoditized in Indonesia, and Philippines has created a ‘safe harbour’. Where Malaysia goes with this will be interesting to watch. It is a late entrant and has the benefit of hindsight from its neighbours. However, in the long run we’re pretty bullish on tokenization. Definitely.
How does Celebrus Advisory see itself in the business of tokenisation?
Well in the end, tokenisation is meant towards ownership of something. So, we think that tokenisation is a process and not the end goal. This is where we come in, to assist in giving advice on regulation and ownership of assets backing the tokens.
For more of Edmund Yong’s insights into tokenization, catch the full interview in the second issue of UM RegTech’s VisioBloc report: The Crypto-Fundraising Landscape
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