Tokenisation is gaining pull and plausibility

Excitement around tokenisation is sweeping through the financial world – but excitement alone is not enough

Week after week, someone releases a new estimate of how many trillions of dollars of assets will be tokenised in the next few years. Breathless optimism around the promise of a new technology is hardly rare in the tech world, and they don’t always pan out as expected. But for tokenisation, the excitement has spread well beyond the boardrooms of Silicon Valley venture capitalists.

More renowned institutions like the Bank for International Settlements have planted their flag in the camp that holds that tokenisation should become the plumbing of the financial systems of the future. In their ‘Finternet’ paper, the BIS lays out a vision of an ecosystem where assets from an enormous variety of classes are tokenised, allowing them to be seamlessly exchanged for tokenised versions of cash without settlement delays and the risks and costs they entail.

But excitement alone is not enough. Delivering a tokenised ecosystem will take a great deal of work. Fortunately, years of experiments and proofs-of-concept have proven that the basic functionality of tokenisation – representing an object as a token on some version of a ledger (often shared or distributed) between network participants – is not especially technically difficult.

In this edition of OMFIF’s Digital Monetary Institute Journal, our expert members give their opinions on where tokenisation is heading, where the process is taking us and how to approach outstanding issues along the way. This year’s DMI Journal is based on discussions that took place at the 2024 Digital money summit, our annual flagship event where experts and policy-makers discuss the future of money.

In a conversation at the summit, Nick Kerigan, managing director and head of innovation at Swift, expanded on the infrastructure necessary to realise the BIS’ vision of the ‘Finternet’: ‘A messaging layer – for the exchange of rich, structured data about a transaction – would be a critical component of something like the Finternet.’

However, the technology stack of a fully tokenised ecosystem requires much more than the basic functionality, and as new asset classes are tokenised, many of these problems will become more complex. Scalability, interoperability between ledgers, integration with existing systems and, perhaps most importantly, security, will all require extensive development and testing to prove they are suitable for financial markets.

The governance considerations involved in delivering a tokenised ecosystem will perhaps be even more challenging. For such a system to be valuable, it must operate across borders to ensure that liquidity is not trapped in siloes. That means agreeing on governance standards for the trading of a broad variety of instruments. Developing that kind of commonality will not be easy, and as Rajeev Bhamra, head of digital economy strategy at Moody’s Ratings, writes, not everyone will necessarily be pulling in the same direction because ‘some market participants may be reluctant to adopt this technology due to potential disintermediation’.

However, although the challenges are daunting, tokenisation will not be an all-or-nothing proposition. The journey to a tokenised ecosystem will be made up of incremental steps – tokenising another instrument, building another functionality, onboarding another stakeholder – each of which will be required to have its own justification and generate business value.

These are already emerging. Both the private and public sectors – often in collaboration – are building tokenisation use cases. For instance, Basak Toprak and Wee Kee Toh from Onyx by JP Morgan, highlight Project Agorá as a global industry initiative set on ‘building on the experience gained from the live commercial bank money applications and use cases.’

Pockets of tokenised value are also emerging. Repurchase agreements have been a particularly fertile ground, but signs of tokenisation springing up in other markets are emerging. Financial markets may soon look like a patchwork of different tokenisation projects. From there, if inter-ledger interoperability is solved, we will be closer to the BIS’ vision of the ‘Finternet’. But while challenges remain, the 2024 DMI Journal finds that it is undoubtably an immensely exciting time for financial market infrastructure.

Lewis McLellan is Editor, Digital Monetary Institute at OMFIF.

Read the DMI Journal 2024 here.

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