This is a guest opinion post from Jean-Marc Stenger, CEO of Societe Generale – FORGE.
2021 has been characterised by a strong acceleration of clients adopting blockchain technology in capital markets through digital native securities. Over the past few years, many of our clients have closely followed our activities in digital securities, whether that be our first structured product issued as a Security Token or our EIB digital bond issuance.
Yet in 2021, we saw clients shift from being interested observers to more active participants who are very keen to enter this field. In the last four months Societe Generale – FORGE has organised close to twenty secondary market transactions in different securities, up from just two in 2020, and we are seeing similar growth on the issuance side, where our pipeline for 2022 is now tenfold that of 2021.
Interest has peaked for numerous reasons. Digitising financial instruments reduces costs when it comes to post trade operations. Everything that happens during the lifecycle of the financial product is quicker and automated, but also the market reach is potentially better because clients have access to a worldwide market infrastructure. For issuers, this enhances access to investors. On the other side, investors will be able to access a truly diversified portfolio of assets with investment opportunities not constrained by regional or market infrastructure.
Acceleration has also been supported by EU activity. As well as the ECB targeting to create a prototype of the digital euro by 2023, the European Parliament has now launched a pilot regime for security tokenisation and waving some regulatory requirements for the sandbox programme. This will create a liquid security token market across Europe and the threshold for transactions within this programme has been set surprisingly high.
As we move into 2022, we are no longer in the experimental phase of security tokenisation. Where last year we were focusing on initial smaller primary market transactions of approximately €100 million, today we are discussing transactions in the €500 million range, demonstrating significant investor appetite.
Growth has also been driven by asset managers looking for custody solutions when setting up cryptocurrency funds. Where previously this demand came from pure crypto funds investing in cryptocurrency and assets, today we are seeing accelerated demand from hybrid portfolios, including equity from companies active in the space, as well as digital securities and tokens.
At Societe Generale – FORGE, as we move into 2022, we are continuing to focus on areas of the market where we already demonstrate strength: focusing first on bonds and structured products and then progressively to enhance the features, functionalities and asset servicing around these products. We need to bring them to maturity before broadening to other asset classes. A focus for us will be reinforcing our digital assets capabilities to allow us to integrate security token issuances into our day-to-day offering for all professional clients.
Looking ahead, there are still many questions about the adoption of digital securities and a running debate on when mass adoption will fully take hold. We expect the pace of change to remain in line with 2021 for the next two years as we consolidate recent growth and central banks move forward with their proposed objectives. Once these “building blocks” have been developed, we expect to see a further explosion of demand from clients for these types of assets.
To cater to this demand, players across the market – including Societe Generale – are investing heavily in their workforces and operational systems to create dedicated digital assets divisions. This will continue to be a priority across the industry in 2022, as established financial institutions and next generation crypto players alike look to bring in experts who can navigate upcoming shifts in the market, from servicing this increased demand to managing and complying with widespread regulation, which is expected to be introduced in the coming years.
