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Over recent weeks and months, we have seen several stories concerning tokenisation, this week’s main story looks at the IMF, The World Bank and the Bank of International Settlements’ latest collaboration into tokenisation. Tokenisation is not a new term, it has been synonymous with the rise of blockchain technology and the advent of ‘web 3.0’ over the last 5+ years, some would even say the last 15 years since the launch of Bitcoin. However, tokenisation seems to be experiencing a renaissance so this week we will concentrate specifically on tokenisation, in particular, we will look to answer the following questions:
When will tokenisations revolutionise the financial system? ⏳
What even is tokenisation? 🤯
Why should we tokenise assets? 🤨
How are assets tokenised? 🧐
Who is working on tokenisation projects?🇸🇬🇫🇷🇦🇺
Where will tokenisation thrive? 🇪🇺🇭🇰🇬🇧
When will tokenisations revolutionise the financial system? ⏳
This week the IMF, The World Bank, and the Bank of International Settlements announced a collaboration alongside the Swiss National Bank that will look to revolutionise global financial systems through tokenisation. The initial scope of their investigation will explore the tokenisation of promissory notes. The hope for the project is that it will streamline the current complex processes involved in wealthier countries, contributing to the World Bank’s funds that support those less affluent nations. The long-term vision of this endeavour is to digitize more financial instruments, bringing increased efficiencies, while also potentially supporting the ability to encode policy and regulatory requirements into the underlying protocol.
Sources:
Read more on this story from Reuters
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What even is tokenisation? 🤯
Tokenisation is typically defined as the process of issuing a digital representation of a traditional asset via a blockchain. Tokenisation can be applied to any asset, including physical assets like real estate and artworks, digital assets like gaming credits, and even currencies. There are three broad classifications of tokens; cryptocurrencies, utility tokens, and tokenised securities. Cryptocurrencies are intended as a medium of exchange. Utility tokens grant the holder certain privileges or allow them to perform certain actions within a ‘token economy’ (akin to a digitised version of plastic tokens used to get on a roller coaster). Tokenised securities entitle the owner to profit-sharing or dividends.
To date, the most successful use case for tokenisation has been stablecoins, which are a type of cryptocurrency whose value is pegged to a fiat currency (or physical commodity), with the promise that the coin value will remain consistent over time unlike the volatility observed with typical cryptocurrencies.
Sources:
Read more about Tokens in Oliveira, L., Zavolokina, L., Bauer, I. and Schwabe, G., 2018, December. To token or not to token: Tools for understanding blockchain tokens. ICIS.
Why should we tokenise assets? 🤨
One of the benefits of tokenisation is that it is asset agnostic, meaning that practically any asset can be tokenised (see How are assets tokenised below for details). However, the important thing to stress is that not everything that can be tokenised should be tokenised. With that said, when assets are tokenised, they can result in real advantages including:
Fractionalisation. Tokenised assets can be divided into much smaller parts than traditional assets, as a result, this improves accessibility as the barrier to entry is much lower to invest in a fraction of an asset rather than requiring sufficient capital to purchase the full asset.
Programmability. The smart contracts which are embedded within tokenised assets allow for operations like interest calculations directly into the asset itself, thus resulting in significant operational cost savings. Furthermore, this innovation unlocks the potential for entirely new products to be created in this space.
Settlement speed - Trading of traditional assets can be time slow and arduous task, often taking multiple days to settle. Tokenisation reduces settlement time to a matter of seconds. For investors, not only does this reduce costs, but it also reduces their risks. For example, in higher interest rate environments, faster settlement times equate to real savings, which is a very tangible benefit in the near term.
Transparency. Blockchain technology has always boasted the transparency it brings to the transactions that are performed on the network. Compared to the manual and often retroactive auditing that is required in traditional finance, tokenisation makes real-time reporting, which can even be programmed into the tokens themselves, enhancing trust in the entire system.
Sources:
Read more on McKinsey
How are assets tokenised? 🧐
McKinsey produced an insightful article back in August that details a high-level, four-step process to tokenisation. The full article is linked below but we will summarise the process of tokenisation here:
Asset Sourcing. This is the process of identifying the assets you wish to tokenise and then understanding their features and how this will impact the structure and classification of the token, as well as any regulatory implications.
Token Issuance and Custody. A common question or fear around the tokenisation of physical assets in particular goes something like this - “I understand I can trade the new digital representation, but what if something happens to the underlying physical asset”. Therefore, it is critical to move the asset to a controlled location under the security of a qualified custodian. Once secure, the digital representation can be created on the blockchain.
Token Distribution and Trading. The token can be distributed to investors through traditional channels or new channels like digital asset exchanges. The trading capabilities are determined by the design of the token, for example, tokens may have embedded functionality (via smart contracts) that make them non-fungible, burnable, or even non-tradable.
Asset Servicing and Data Reconciliation. Once live, a token will require ongoing servicing, including regulatory, tax, and accounting reporting, notice of corporate actions, and periodic calculation of net asset value (NAV). Again, this can change depending on the token classification, and the underlying asset itself.
Sources:
Read the full article from McKinsey
Who is working on tokenisation projects?🇸🇬🇫🇷🇦🇺
The Monetary Authority of Singapore, the country’s central bank, announced earlier this month that it would begin testing tokenisation use cases in collaboration with some of the financial services industry big names including JPMorgan (JPM), DBS (D05) and BNY Mellon (BK). The nature of the use cases will include bilateral digital asset trades, foreign currency payments, multicurrency clearing and settlement, fund management and automated portfolio rebalancing. Earlier this year, Australia and New Zealand Banking Group Limited (ANZ) completed the first use-case of carbon credit trading as part of Australia's central bank digital currency (CBDC) pilot.
This week, in France, the nation’s third-largest bank, Societe Generale , issued its first digital green bond on the public Ethereum blockchain. The purpose of green bonds is for the proceeds to be spent on projects with environmental benefits. This follows the news from last week where The European Investment Bank (EIB) launched its second euro-denominated digital bond on a private blockchain, in partnership with Goldman Sachs Bank Europe, Santander and Societe Generale. The 100 million euro, two-year bond was issued, recorded and settled using private blockchain-based technology.
Sources:
Read more on the story on CoinDesk, Reuters, Reuters, CoinDesk
Where will tokenisation thrive? 🇪🇺🇭🇰🇬🇧
A lack of regulatory clarity has long been stated as a factor that has contributed to the slow uptake of tokenisation. However, this is beginning to change, and therefore, it stands to reason that the regions that are establishing clear regulations around tokenised assets will have an advantage in the future of this space. In the European Union, the newly introduced Markets in Crypto Assets (MiCA) regulation protects investors and regulatory clarity around crypto asset classification. In Hong Kong, the Securities and Futures Commission (SFC) said they will allow primary dealing of tokenisation by providing more guidance on tokenised securities-related activities. As discussed in last week’s newsletter, in the UK a government working group gave investment firms the seal of approval for tokenisation as they published a report on implementing tokenisation of funds. The full report is linked here.
Sources:
Read more on the story on Coindesk, Coindesk, European Council
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