For several years, blockchain innovation in financial services was largely characterised by experimentation. Today, developments point to a far more substantive shift, particularly around tokenisation, which has moved from concept to implementation across multiple areas of financial markets.
A new report by OMFIF and Luxembourg for Finance highlights a clear trend: regulators, financial institutions and market infrastructure are increasingly aligned on the view that tokenisation can enhance the way assets are issued, managed and exchanged. Early use cases support this, already providing us with a glimpse of more efficient collateral management and new forms of capital market access.
At the same time, however, challenges remain and adoption is still uneven. Legal frameworks and regulatory treatment, particularly in relation to cash settlement, will continue to shape the development of tokenisation. These are not marginal considerations either; they are central to how tokenisation will integrate into the global financial system. Indeed, the benefits of tokenisation will only be fully realised if entire processes move on chain rather than merely duplicating off-chain processes.
Tokenisation thus represents a broader reconfiguration of financial infrastructure – one that combines distributed ledger technology, automation and evolving regulatory approaches. This could improve efficiency, expand financial services access and support new forms of intermediation.
Getting the legal nuances right
Although tokenisation emulates the protective features of traditional finance, moving assets to token form can result in novel legal risks. Financial assets exist within a legal framework. If we are to reflect this legal framework when the assets are in token form, the nuances of the legal relationship of the token to the assets they represent is of the first importance.
Not all tokenisation is created equal. The legal nuances can be subtle but are important to understand. It is possible for a token to fully embody the asset. Some issuers have made their assets available on chain and the transfer of tokens represents transfers of securities in the master record of ownership.
In other cases, the token does not necessarily represent ownership of an asset. The asset can be immobilised and tokens sold against it, but tokenholders’ interest in the asset is indirect. Others provide exposure to the economic performance of an asset, but do not confer ownership, voting rights or any other claims regarding the asset.
The OMFIF-LFF report explores exactly what a token purporting to represent a financial asset entitles the holder to. ‘Tokenisation frameworks: designs for a new era’ examines the different types of tokenisation across several asset classes, the benefits they bring and the legal structures that are enabling this activity. As these instruments become more common, market participants will need to exercise caution to ensure that they understand what the tokens they hold entitle them to.
The report also looks at some of the challenges holding back further adoption of tokenisation, particularly around regulators’ treatment of public and permissionless blockchains at commercial banks.
Finally, the report explores some of the potentially transformative impacts tokenisation could have in the future, including broader retail access, a new cadence for institutional funding and programmability integration with sustainable debt instruments.
Tom Théobald, chief executive officer at Luxembourg for Finance, said: this report ‘contributes to a more informed and constructive dialogue on developments in tokenisation. The findings here reflect both the progress that has already been achieved, but also the challenges that remain. They also point to a direction of travel that is clear: tokenisation is set to play a central role in the future of financial services.’
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