A pressing question for central banks is the role of tokenisation and digitisation in finance. They are contemplating how swiftly to digitise their own currencies. If every currency transitions to a digital format, what implications does this have for bank payments and payment companies such as Visa and Mastercard? Larry Fink, CEO of Blackrock, addressed these concerns during a recent panel discussion at the Future Investment Momentum in Saudi Arabia, highlighting the importance of the topic. Tokenisation refers to the conversion of real-world assets—such as stocks, bonds, real estate, or currencies—into digital tokens on a blockchain or distributed ledger.
In traditional finance, ownership of a company share is represented by an entry in a database maintained by a depository, requiring validation from various intermediaries like brokers and exchanges. In contrast, in a tokenised environment, ownership is represented by a digital token on a blockchain, with the token serving as proof of ownership and the blockchain providing a reliable source of truth. Tokenisation could significantly impact global finance by enabling the fractionalisation of illiquid assets, such as real estate or fine art. For example, a $10 million property could be divided into 10 million tokens worth $1 each, allowing small investors to acquire a stake and trade it continuously in a digital marketplace.
This innovation could expand investment opportunities and potentially stimulate economic growth by enhancing liquidity and accessibility. Currently, financial transactions involve multiple intermediaries, adding time, cost, and complexity. Tokenisation using blockchain technology can automate many of these processes through smart contracts. For instance, a smart bond could automatically distribute interest payments to token holders on designated dates, eliminating manual processing and enhancing efficiency while reducing costs. Each transaction involving a tokenised asset is documented on a shared, tamper-resistant ledger, providing a comprehensive and transparent audit trail that diminishes the risk of fraud and facilitates compliance.
As Fink pointed out regarding the concept of a digital wallet, assets could have embedded rules enabling automated compliance for various scenarios, such as restricting token ownership to accredited investors. If central banks were to issue central bank digital currencies (CBDCs) and assets were tokenised, it might be possible to purchase a tokenised car using a tokenised digital dollar directly from one digital wallet to another. Nonetheless, significant challenges must be addressed, including regulatory uncertainty and fragmentation. It remains unclear what legal rights token holders possess or whether a tokenised stock holds the same legal status as a traditional stock. Current securities laws do not accommodate this technology, and achieving clear, consistent, and coordinated global regulations poses a major obstacle.
Additionally, jurisdictional arbitrage presents another legal complication; countries with lax regulations could become hubs for risky tokenised products, jeopardising global financial stability. Technological and operational challenges also exist, particularly concerning interoperability among various blockchains and traditional systems. The scalability of blockchain technology must be assessed to ensure it can handle the demands of the global financial system. Systemic risks and financial stability issues could arise as a decentralised system may create new concentrated points of failure, such as dominant digital wallet providers or blockchain platforms. Furthermore, the increased interconnectivity and continuous trading could lead to rapid financial shocks that escalate into contagion risks.
Societal and economic implications also need consideration, as a fully tokenised system might alienate populations lacking reliable internet access or digital literacy, thereby worsening inequality. While tokenisation holds the potential for a more efficient, inclusive, and liquid financial system, it necessitates careful navigation through a complex web of regulatory, technological, and societal challenges. The transition will not be straightforward but will involve a coexistence of existing and emerging systems. The nations and institutions that successfully manage this transition through comprehensive regulations, secure technologies, and inclusive frameworks are poised to shape the next phase of global finance.