The debate on what forms of digital money should exist, whom they should be issued by and what features they should have, grows more complex every day. These debates are then mired in individual arguments surrounding central bank digital currencies, stablecoins and tokenised bank deposits. Still, there is broad support for all three, on the assumption that each could unlock different benefits for consumers and financial markets.
These debates are important. Understanding policy drivers is a key prerequisite if jurisdictions are to effectively determine their priorities, prudential frameworks and introduce the safeguards that protect trust in money.
A more difficult challenge is ensuring these new forms of money are operationally seamless. While these different forms of money are at different stages of maturity, they all share a notable lack of interoperability with one another. After almost a decade of exploring tokenisation’s benefits, we must now collectively address the barriers to be overcome for multiple forms of instruments to coexist in a future landscape. Otherwise, we risk creating an even more fragmented, frictional system.
Cross-industry co-operation
Technical interoperability is by far the most important, yet potentially the most challenging barrier. For tokenisation to be adopted at scale in financial markets, assets and money need to seamlessly move across blockchains, legacy systems and integrate data from the real world in real time.
The legacy infrastructure that underpins today’s global markets has achieved a degree of technical interoperability over time. Today, however, progress is being impeded by fragmentation, with incumbents, technology providers and issuers most typically pursuing siloed strategies.
While various initiatives to explore tokenised deposits have taken place among banks and regulators, these have tended to rely on technological solutions designed by and solely accessible to incumbents. While these choices have been made in part to support compliance, they have limited the potential for genuine transformation of financial market infrastructure.
Arguably, stablecoin issuers have thought about interoperability in the most holistic way – through the necessities of their distribution models – by partnering with traditional rails and Layer 1 networks to support multi-chain deployment.
What is now needed to build effective interoperability is for all industry players – from incumbents, to issuers, custodians, DLT and financial market infrastructure – to work collaboratively towards common processes, standards and governance roles.
The role of the public sector
In other areas of both technology and finance, efforts towards harmonisation have often faced early scepticism due to the perception that a top-down approach may unintentionally and prematurely codify practices, roles and nomenclatures.
However, the benefits of tokenisation and DLT-based markets cannot be fully realised without a common framework. Here, the public and private sectors will play different roles in supporting convergence.
First, we need a common asset taxonomy, based on the nature of the claim, its backing, its form and access. The design of this taxonomy should not focus on which instruments will prevail, but rather on the distinct benefits that their specific characteristics confer to users and markets.
Second, the public sector needs to turn its attention to regulatory interoperability and to the mutual recognition principles that can underpin reciprocity agreements. Without cross-border alignment, true digital transformation will be lost and, more crucially, liquidity will remain trapped and fragmented with major costs to consumers and markets.
Finally, the public sector should actively support the development of and participation in shared, open infrastructure standards, ensuring that the settlement layer underpinning tokenised markets is accessible, neutral and resilient. The public sector can also play a key role in catalysing and enabling the transition from experiment to live adoption.
The next decade of tokenisation will be defined not by sophisticated solutions, but by the market’s collective ability to make them work together. Building a genuinely interoperable tokenised ecosystem is largely within reach. But progress towards this goal requires deliberate choices starting now.
Isadora Arredondo is Vice President of Global Policy at Hedera.
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