Tokenisation has potential to transform financial system with key value unlocked post-issuance

“The tokenisation of financial assets through distributed ledgers and blockchain technologies has tremendous potential to shift the way assets are managed and leveraged”. Many believe it has the potential to transform the financial system globally, and most of the value in tokenisation will be unlocked post-issuance. These are some of the key findings of a report published by UK Finance in partnership with Oliver Wyman. The report looks at how the UK can lead digital transformation and consolidate its role as a global financial center by unlocking the power of securities tokenisation.

The report focuses on tokenisation of securities including vanilla flow instruments (equities, bonds, loans, money markets) traditionally illiquid products e.g., real estate, and structured finance. It identifies the key benefits of tokenisation as:

• Increased operations efficiencies e.g., instant settlement

• Access to new asset classes.

• Lower transaction costs.

• Lower asset servicing costs.

• Ability to better manage certain risks e.g., counterparty risk.

The report acknowledges that these benefits have yet to be realised at scale and that global tokenised issuances are still a fraction of traditional securities issuance (see figure 1). While 2022 saw a range of tokenisation initiatives these were largely experimental and in most cases these only tokenised specific parts of the lifecycle. For example, the report found no instances where the security is tokenised end-to-end across the entire lifecycle e.g., including using the security as collateral after issuance. The report also noted that “issuing a tokenised security has limited value for the secondary market if it cannot be used for other purposes such as being pledged as collateral or repo’d for short term funding."