The valuation of tokens is coming….

July 23, 2024

Although it was already on our radar, comments from the FCA have put it up the agenda

I’m writing on a gloriously sunny day here in Somerset, having taken a bit of time out from approving valuation reports and signing valuation certificates.  On average, we are completing one report a day at the moment, but always have appetite for more!

If you have clients for whom it would be helpful to spend some time in August examining company, share or asset values, we would love to help.

When I prepare these emails I always want to add value.  As you know the FCA and the SEC are looking at private markets valuations.  My hunt for an interesting angle led me to the FCA website and this speech from the Chair of the FCA, Ashley Alder. Our ambitious agenda for UK asset management | FCA.

One takeaway was the sheer size of the global private markets. I quote:

• UK asset managers are now responsible for £11 trillion of mainstream assets and £2 trillion of alternative assets.
• Global private finance is experiencing rapid expansion, with annualised growth of nearly 18% since 2017 and private market assets under management reaching US$12.8 trillion by 2022.

That’s a lot of potential work for both lawyers and ourselves.

This quote explains why the FCA is so interested.

“While values are ultimately crystallised on exit, there is the potential for inflated values to support borrowing, avoid covenant breaches, and support fund performance and therefore fundraising. Where liquidity is provided to investors this can also result in unfair redemption prices.

These risks cut across all FCA objectives, and it is for this reason we are undertaking domestic supervisory work in relation to valuations. We also co-lead an important workstream on leverage in the non-banking sector for the global Financial Stability Board (FSB).

There are also separate questions about how this translates into risks in fund structures, especially open-ended structures. Much work has been done on this through the FSB and the International Organization of Securities Commissions (IOSCO) and it was good to see consensus reached last year on liquidity management, with a clear position that illiquid assets should not be held in daily dealing structures.”

More food for thought…

But the contents of the section on Innovation, that might have been missed, gave me the nugget I wanted to socialise with you today.

“One special area of focus for us has been on fund tokenisation. Asset managers continue to explore commercial uses for fund tokenisation and there is growing industry interest in the benefits of this technology.”

It made me think about the value of tokens and how we would approach such a valuation request,  Funnily enough, we have been exposed to the issue in prior valuation exercises

The first thing is that there is a lot of data out there and it’s a much-debated market, so insights are easy to find when we do Evidence Collection.  We have access to experts who can help us with the most deeply technical issues if needed.

Although cryptocurrencies and tokens have been around for a while now, the FCA is right to put them in the innovation bucket.  There are so many uses for tokens.

So if we were to value a token we would primarily be looking at its use.  This will then drive our approach, starting with the question: does that specific token work in the use case (and is it the best token to be used)?

We would then look at it in the context of its market.  Essentially, is the token or the company using the token outperforming its peers or not?

Then we would be looking at the numbers..  What is the cashflow being generated because of the existence of the token; who or what is benefitting from that cashflow and finally is there a readily available market price for the token itself.

There’s a whole lot more research that we do, and no token valuation exercise would be a 5 minute job.  There is just too much to think about and discuss before you could be sure to get to an answer I would be prepared to sign-off.

In the meantime enjoy what I hope is going to be a slightly less pressured holiday period.