Forefront by TSMP: Democratising Luxury

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Forefront by TSMP

3 March 2021

Democratising Luxury

Asset tokenisation is poised to tear down the high barriers to luxury investments.

By June Ho

Imagine you are a whisky aficionado. Having witnessed rare Scotch trounce many investments over the past 10 years, you are eager to jump on the bandwagon. It is, after all, a complementary way to fund an expensive hobby; according to industry watcher Rare Whisky 101’s Rare Whisky Icon 100 Index, UK auction prices of 100 iconic collectors’ bottles have almost quadrupled since 2012.

You could proceed in a couple of ways, but each is fraught with its own pitfalls. First, you could buy individual bottles on the secondary market. But with many convincing fakes in circulation, proving provenance is a problem. Then there is storage: the bottles take up cellar space, and previous owners who have stashed the bottles in less-than-ideal conditions may leave you with duds.

Or you could purchase a cask direct from its distillery. But this is a massive commitment, both in terms of cost as well as quantity. For example, the “Casks of Distinction” (COD), a collectable barrel by the world’s largest alcohol company Diageo, starts at around six figures – which requires not only a huge initial financial outlay, but the typical 300-to-500-litre keg cannot be subdivided easily, which limits its tradability.

A nascent third way is promising to shake up rare whiskies and other luxury asset investments: asset tokenisation. Earlier this year, independent Singapore-based financial services group PrimePartners launched a digital asset-based security linked to Diageo’s COD on Singapore-based Hg Exchange (HGX), a members-only exchange for digital assets, among other things.

This South-east Asian first-of-its-kind offering is open to accredited investors who may purchase and trade tokens listed on HGX, each of which represents a bottle from one of five CODs, including a cask distilled in 1979 from “ghost” distillery Port Ellen (which shut its doors in 1983 before being recently revived) and a 1990 Caol Ila.

On the casks’ maturity, investors can either cash out or take delivery of the whisky bottled from the casks.

(Disclosure: TSMP Law Corporation advised sponsor PrimePartners and issuer Rare Cask Holdings in this transaction.)

How tokenisation works

Traditionally, high-value non-fungible assets such as private islands and corporate jets – as opposed to fungible assets like gold and cryptocurrency, which are mutually interchangeable –  are troublesome to trade for several reasons.

When sold as wholes, such assets could take years to liquidate, with owners having to hunt for a suitable deep-pocketed buyer. They also tend to be difficult, if not impossible, to physically transfer or divide, so buyers and sellers have to trade paper that represents some or all of these assets. Even if you could divide the assets and sell portions to various interested investors, the legal agreements involved are complex (and not always to the delight of lawyers).

Another problem is verifying their provenance after they have changed hands several times around the globe among faceless investors. That tiara could consist of blood diamonds or that Rembrandt could in fact have been stolen.

Case in point: In the 2000s, a young Indonesian man, Rudy Kurniawan, wowed the wine-collecting circles by courting connoisseurs and trading in millions of dollars of rare vintages, often breaking records. He showed so much affinity for the ultra-high-end producer Domaine de la Romanée-Conti that he became known as “Dr Conti”. His scheme started to unravel when doubting auction houses investigated and discovered that, among other anomalies, he was offering more magnum bottles of 1947 Château Lafleur than were ever produced. Kurniawan was eventually jailed for passing off inexpensive Napa Valley wines as old Burgundies in what became the greatest wine fraud in history.

Asset tokenisation solves these problems. First, the process involves issuing blockchain tokens that digitally represent an asset, allowing investments in a fractional interest of the asset – say five per cent of a Michelangelo sculpture – which you can then sell at your discretion to other like-minded investors on private exchanges. In other words, tokenisation allows greater liquidity by introducing new business models and allowing new market participants to enter what was previously a market with high entry barriers.

In 2018, the first blockchain platform for art investment, Maecenas, facilitated the sale of a 31.5 per cent stake, worth US$1.7 million, in Andy Warhol’s 14 Small Electric Chairs.

Second, data in the blockchain assigns each non-fungible token a unique reference, tying the token to an irreplaceable asset. In this way, blockchain technology offers a secure, efficient and transparent solution to the provenance problem – embedded information on the token enables investors to track the item at every stage, from the origins of the raw materials through the domestic and international supply chain to an immutable chronological record of its ownership. In a sense, blockchain is the new age “certificate of authenticity”, but one that is near impossible to hack, steal or forge.

Regulatory challenges

Asset tokenisation has also made fundraising much cheaper. Unlike the traditional investment process, a digital token can be issued and traded without the need for any central third-party or intermediaries such as issuing institutions. Tokens can be issued by just about anyone, from regular SMEs to global conglomerates. Distribution is simplified and trading can take place 24/7 due to the always-on, peer-to-peer nature of the blockchain technology. Simply put, tokenisation takes quite a lot of the pain and cost out of traditional investing.

But regulatory challenges exist, principally around the protection of investors. Traditional investor protection models have been to regulate offerings based on asset classes, be they shares, debt instruments or commodities. As new investment instruments are created in an increasingly disrupted business world, laws can struggle to keep up with their features, which often render them hybrids of current asset classes.

Anti-money laundering and know-your-customer checks are another area of concern – tokens, and more generally the freewheeling ways of the market for digital investments, make this fertile ground for criminals looking to launder money or transfer illicit assets. These are issues on which governments are keeping a close eye.

Democratising luxury asset investment

The ongoing Covid-19 pandemic has widened the wealth gap, with low-income workers losing their jobs completely while white-collar professionals continued to work as per new-normal from their homes.

One of the results of this inequality: luxury assets have continued to hold or even increase in value as well-heeled investors chase for returns. According to property services firm Knight Frank’s Luxury Investment Index 2021, the prices of rare whiskies, classic cars and fine wines has increased 5.8, 2.9 and 2.3 times respectively in the past decade.

Tokens allow the investing masses to take an upside from rising value in areas that were traditionally beyond their reach. But perhaps the best bit: tokens also offer passion investors bragging rights of owning a slice of Mona Lisa’s iconic smile or a piece of Michelangelo’s David’s “crown jewels”, should those works ever come up for sale.