Why Financial Service Providers (FSPs) Should Register for Crypto Asset Service Provision

The rise of tokenisation—transforming physical assets like bonds, equities, and real estate into digital tokens—is reshaping the financial sector. Although this may seem exaggerated, it accurately reflects the rapid changes occurring. For financial services providers (FSPs) in South Africa, adopting tokenisation and crypto asset service provision is essential, not just for gaining a competitive advantage, but for maintaining relevance in the future.

Clearing up misconceptions

Many people mistakenly associate crypto assets solely with cryptocurrencies like Bitcoin or Ethereum. The term “crypto” refers to cryptography, the secure underlying technology of blockchain. Crypto assets encompass a broader range of investments, including tokenised representations of bonds, equities, funds, commodities, and other tangible assets.

Despite the expansive definition, most financial advisors are unable to provide advice on these assets due to a lack of the necessary crypto asset category in their licensing. This limitation hinders their ability to respond to the increasing client demand for tokenised financial assets, potentially leaving them out of a lucrative and swiftly developing market.

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It’s clear that FSPs need to add the crypto asset category to their licenses. This step is crucial to remain relevant and to equip themselves to provide a comprehensive array of financial services to their clients.

Defining tokenisation

At its core, tokenisation is the process of creating a digital representation of real-world financial assets—such as bonds, shares, real estate, or commodities—on a blockchain. This innovation allows for fractional ownership of these assets, thereby broadening access to investments that are typically illiquid or high-value.

Larry Fink, CEO of BlackRock, does not underestimate the significance of this future. He stated: “The next generation for markets, the next generation for securities, will be tokenisation of securities. It’s going to make the markets much more efficient.”

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To grasp the magnitude of tokenisation, consider this analogy: In 2022, the tokenised asset market was valued at $310 billion. A prediction from a BCG Report estimates that by 2030, this market could reach $16 trillion—accounting for 10% of global GDP.

The momentum behind tokenisation is rapidly increasing—advisors who hesitate may find themselves outpaced by competitors eager to leverage these opportunities.

How tokenisation benefits FSPs

1. Expanding investment opportunities to include alternative assets

Investors are always on the lookout for fresh opportunities, and tokenisation has unveiled a spectrum of options. It provides access to varied markets, including real estate, bonds, and even luxury items like art. Tokenisation enables FSPs to create innovative investment solutions to meet the growing appetite for alternative assets. In 2024, Mesh.trade introduced Africa’s first tokenised corporate bond, with numerous other groundbreaking products on the way. This is the evolving landscape of investing, and that evolution is occurring now. Mike Novogratz, CEO of Galaxy Digital, noted: “Tokenisation can fractionalise ownership of anything, democratise access, and unlock global investment.”

1. Democratising wealth with access for all

Fractional ownership facilitated by tokenisation enables a wider range of individuals to invest in high-value assets, leveling the playing field and fostering inclusivity in wealth creation. This principle is central to Finance 3.0, opening numerous new avenues.

A recent PwC study revealed that 57% of investors worldwide are actively exploring tokenised assets, driven mainly by retail investors.

1. Ease of use with enhanced liquidity and market efficiency

Tokenised assets offer superior liquidity, allowing them to be divided into smaller units and traded globally. The blockchain technology underpinning them ensures efficient transactions at reduced costs, effectively turning traditional investing on its head. Vitalik Buterin, co-founder of Ethereum, elaborated: “Tokenisation isn’t just about efficiency – it’s about creating systems that are fundamentally more fair and accessible.”

1. Transparency

The immutable ledger of blockchain boosts trust, guaranteeing definitive ownership records and secure transactions. Smart contracts automate numerous processes, diminishing the reliance on intermediaries. Consequently, the investment process becomes faster, more transparent, and more efficient. What once was intricate and challenging has transformed into an elegant, nearly instantaneous flow.

Andreas Antonopoulos, a prominent blockchain expert, stated: “With tokenisation, trust is no longer dependent on intermediaries. It’s embedded in the system itself.”

Regulatory compliance is a business imperative

South African regulators, such as the Financial Sector Conduct Authority (FSCA), are actively formulating a regulatory framework for crypto assets and tokenisation. Advisors lacking the crypto asset category on their licenses may miss out on growth opportunities in this sector.

By obtaining this license, FSPs can stay ahead of regulatory changes while offering clients a comprehensive range of services, including advice on tokenised bonds, equities, and other assets. Crucially, FSPs can avoid losing clients to competitors who are better equipped to handle the increasing demand for crypto asset products.

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This phenomenon extends beyond South Africa. Christine Lagarde, president of the European Central Bank, has warned that “regulation is inevitable, and those who prepare today will shape tomorrow’s financial systems.” To risk a cliché, tomorrow has arrived.

The importance of acting now

Venture capitalist Tim Draper remarked: “Tokenisation is not just the future of finance – it is the future of everything.” With the industry moving fast, those who act promptly will be better positioned to cater to the rising demand. An increasing number of clients are seeking tokenised investment options from their advisors.

Being proactive now equips FSPs with a significant competitive advantage and helps them to be recognized as forward-thinking, technologically adept advisors. This also opens up new revenue streams associated with having a crypto asset category on their license.

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The best advice for FSPs is: Don’t hesitate. Register for crypto asset service provision now and position yourself at the forefront of Finance 3.0 and the next phase of capital markets.

Connie Bloem is co-founder and MD of Mesh.trade.

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