The rights to various assets can be converted into digital tokens by virtue of distributed ledger technology. This process enhances accessibility and liquidity and can apply to all title-based things, both tangible and intangible in nature. The most prominent use cases include real estate, legacy financial instruments, commodities, intellectual property, art and digital assets.
Tokenisation enables fractional ownership – making investments more accessible – while increasing transparency and reducing transaction costs. This innovative approach has the potential to restructure asset ownership and trading, offering a more efficient and inclusive investment landscape.
There are questions concerning where the cash leg of tokenised asset transactions can come from. This can range from wholesale central bank digital currencies, tokenised commercial money or private sector stablecoins. Wholesale CBDCs, issued by central banks, offer high security and efficiency for large transactions. Tokenised commercial money, managed by commercial banks, provides familiarity and integration with legacy banking services, ideal for retail and business use. Private sector stablecoins, pegged to stable assets, enable fast, low-cost transactions and are suited for global and decentralised finance applications.
The choice depends on regulatory factors, transaction scale and the need for security and efficiency. Interoperability is key to countervail potential market fragmentation, thereby enabling the next iteration of global liquidity provision.
Bearer assets
Tokens can be either bearer assets or represent claims upon an asset. Bearer assets, which directly equate to ownership, indicate that possession of the token is sufficient to claim ownership – akin to physical cash or bearer bonds. This simplifies transactions by eliminating intermediaries.
On the other hand, tokens that represent claims provide a legal entitlement to the underlying asset, often managed by a custodian or intermediary, ensuring regulatory compliance and legal protection. The design and legal framework of the token determine its nature, with bearer assets offering immediacy and tokens as claims ensuring regulatory adherence.
Investors can hold tokens in digital wallets, either custodial (managed by third-party services) or non-custodial (self-managed). Deposit services are provided by traditional financial institutions, specialised crypto custodians like PolySign or Uphold and various DLT platforms. Measures such as robust private key management, cold storage solutions, regulatory compliance and insurance collectively ensure the safe and secure holding and management of tokenised assets. The inherent security features of DLT, such as immutability and decentralised consensus, further protect token transactions and ownership records.
Changes to market infrastructure
By streamlining asset issuance, trading and settlement through DLT, tokenisation stands to completely revamp legacy market infrastructure. As settlement becomes near-instantaneous, and custody shifts to digital wallets and specialised crypto custodians, there is less reliance on trusted intermediaries, which increases efficiency.
While the role of central securities depositories may also diminish, they can remain relevant by incorporating DLT, offering tokenisation services and ensuring regulatory compliance. This adaptation allows CSDs to bridge traditional and tokenised markets, supporting a smooth transition while maintaining trust and adherence to regulatory standards.
This approach to innovation does not just serve financial markets. Tokenisation also benefits retail users by enabling fractional ownership, increasing liquidity and lowering transaction costs. It offers access to new investment opportunities like real estate, art and private equity, previously limited to institutional investors.
The process of tokenisation also democratises investing, making it more accessible and cost-effective for small investors to better diversify portfolios and participate in a wider range of markets. This will enable a more inclusive, fair and equitable financial system.
Dom Ghazan is Managing Director at Global Trade Finance.
This article featured in the Digital Monetary Institute Journal, summer 2024 edition.
