Tokenisation is already changing businesses across multiple industries.
This was the lead messaging at the Tokens & Tokenisation: Unlocking the Building Blocks of Blockchain webinar, which took place on 21 May as the third in a series of London Blockchain Conference’s webinars focused on explaining the business case for blockchain.
The tokenisation webinar featured five blockchain experts, each with practical experience using tokenisation technology to add value to businesses.
What is Tokenisation, Exactly?
First thing’s first: what is tokenisation? A succinct definition was given by Helen Disney, one of two expert facilitators for the session and founder of blockchain consultancy Unblocked. Disney said that tokenisation is simply creating a digital representation of an asset – which we refer to as a token – that is represented, managed, and can be bought and sold on a blockchain network.
Perhaps the best example to illustrate the promise tokenisation holds for business is stablecoins. Stablecoins are digital assets that have their value pegged to a real-world asset, most commonly fiat like USD and usually by the issuer holding a 1:1 amount of the underlying asset in reserve.
Functionally, it allows people to enjoy all the benefits of digital currencies – portability, speed and ease of use, and cost-efficiency – without exposing themselves to the volatility commonly associated with them.
At their core, stablecoins are tokenising the real-world asset (RWA) of fiat currencies: holders of a stablecoin know (subject to the precise mechanism by which the peg is maintained) that sitting behind their digital asset is concrete value in the real world.
The implications of this are significant, particularly for countries where the local currency is highly volatile itself or where there are barriers to trading the local currency for a neighbouring one. In regions with lots of inter-migration, this is invaluable.
“We can see that in emerging countries, of course, when some money is very unstable,” explained panelist Maxime Hamonic, senior consultant at global strategic and management consulting company Sia. “It makes total sense to try to move to stablecoins – either as a store of value or for cross-border payments.”
Other tokenisation implementations work off the same fundamental principle.
Tokenising a Revolution in Finance
One area where the most progress is being made is in finance, as explained by Breige Tinnelly. Tinnelly was another of the webinar’s guests: a solicitor with more than 20 years of capital markets experience at both large financial institutions and more innovative companies. She’s currently the head of market development at Archax, which is the first Financial Conduct Authority (FCA)-regulated digital asset exchange, broker and custodian.
For Tinnelly, tokenisation’s applicability to the financial world is about removing the “friction in reconciliations that exist in the plumbing of traditional capital markets.”
The plumbing analogy is apt and was picked up by Richard Baker, a 25-year tech veteran and CEO of Tokenovate, a fintech company and post-trade automation platform for derivatives.
“We need reliable infrastructure. The plumbing needs to be delivering certainty – if we want atomic settlement, if we want real-time settlements…the infrastructure that underpins that becomes critical.”
Tinnelly offered some of the examples within financial markets that her firm has been working on in recent months.
“We have tokenised different types of debt, gilts, equity, carbon credits – many different types. Most recently, for the last 12-18 months, we have been looking at – and have tokenised – a series of money market funds.”
In the same way tokenised has led to stablecoins allowing for a marriage between the stability of fiat and the dynamic nature of digital assets, it’s been able to offer the same to all manner of traditional financial assets. The most obvious of these is instantaneous settlement, which allows for further efficiencies for businesses.
Tinnelly’s money market funds (MMF) example illustrates the point well. Traditionally, MMFs invest in short-term, cash and other short-term liquid debt instruments such as Treasury Bills. Tinnelly explained that tokenised MMFs can be used for much more than their obvious purpose: they can be used as collateral, or as a payment leg for settlement. In its traditional form, an MMF could never be used that way.
“These aren’t proof-of-concepts,” explained Tinnelly. “They are live transactions in the market today.”
Barriers Are Disappearing – But Some Remain
As fast as the tokenised industry is progressing, there remain challenges. All panelists touched on the importance of regulatory environments around the world, especially in traditionally regulated markets since as capital markets but beyond them, too.
“The regulatory environment has to be such to enable participation. That has taken time,” explained Tinnelly.
Part of the issue is that the global regulatory environment is advancing at different paces. Some jurisdictions, such as the United Arab Emirates, have been faster than others, shoring up their regulations to ensure they cater to a new, tokenised world. Others, not so much.
Sia’s Maxime Hamonic agreed:
“It’s all about fragmentation – both as a regulatory landscape and the fragmentation of the underlying technology.”
“Without legal certainty and regulatory certainty, the modernisation of all of this can be very difficult,” echoed Tokenovate’s Baker.
For example, some jurisdictions will have dedicated, overarching legislation specifically addressing blockchain-based assets. Others will be relying entirely on legacy rules, such as traditional securities regulations, to cater to new assets. Others will be somewhere in the middle.
Against that background, Tinnelly advises would-be tokenisers to consider the relevant regulations of the jurisdictions they’re issuing tokenised assets from and into. If a token being issued is a pure digital twin, it may not be regulated at all; however, if it looks more like a security or other financial instrument, then stringent securities laws will likely apply.
Kate Baucherel, a published author and digital strategy consultant specialising in blockchain and distributed ledger technology (DLT), offered both a practical example of tokenisation in another field and an example of a common barrier: who’s going to pay for it?
“There was a proof-of-concept with the National Archive back in 2018. They looked at provenancing the basis of films. If you took a video in the 70s on a Super8 and put it onto VHS and then onto a DVD and then converted it into an MP4, it’s still the same film. They developed an AI content-aware system to strip away that formatting and get down to the base content. That could then be tokenised as a unique item.”
“There’s the precedent and the technology – what we don’t yet have is getting people to pay to do it. That’s the challenge: what’s the business case?”
Why Tokenise?
Similarly, Tinnelly advised anyone looking to tokenise an asset to be clear about the business case for doing so.
“Is it an efficiency or cost-saving mechanism? Is it a distribution access point? A utility point? Where are your tangible benefits?” she asked.
“It’s very easy to mint a token – that’s not the difficult part. The risk is that you can mint and tokenise any asset, but the point is you need to be able to get that away; there needs to be a buyer on the other side.”
“Tokenisation cannot and should not be considered as an easy route to raise capital or to get liquidity, unless the underlying transaction makes sense to the investor.”
Challenges aside, however, it’s clear that all five participants in today’s discussion see the current landscape as an exciting time for tokenised assets and digital asset technology more generally. As Baker put it:
“This market is incredibly exciting. I have three young children, and I motivate them all into thinking about the future of finance. If you’re a gamer, or interested in the evolution of music, or housing, we’re going to see tokenisation touch everything, and modernise the economics of our lives. It’s a really inspiring market to work in.”
Missed the webinar? Watch it on-demand here.
