Tokenisation: The new rails of finance

Excitement around tokenisation is sweeping through the financial world. But excitement alone is not enough.

Financial markets may soon look like a patchwork of different tokenisation projects.

ALMOST EVERY week, someone releases a new estimate of how many trillions of dollars of assets will be tokenised in the next few years. But breathless optimism around the promise of a new technology is hardly rare in the tech world, and it doesn't always pan out as expected. For tokenisation, the excitement has spread well beyond the boardrooms of Silicon Valley venture capitalists. More renowned institutions like the Bank for International Settlements have planted their flag in the camp that holds that tokenisation should become the plumbing of the financial systems of the future.

In its ‘Finternet’ paper, the BIS lays out a vision of an ecosystem where assets from an enormous variety of classes are tokenised, allowing them to be seamlessly exchanged for tokenised versions of cash without settlement delays and the risks and costs they entail.

But excitement alone is not enough. Delivering a tokenised ecosystem will take a great deal of work. Fortunately, years of experiments and proofs-of-concept have proven that the basic functionality of tokenisation – representing an object as a token on some version of a ledger (often shared or distributed) between network participants – is not especially difficult technically. However, the technology stack of a fully tokenised ecosystem requires much more than the basic functionality and, as new asset classes are tokenised, many of these problems will become more complex. Scalability, interoperability between ledgers, integration with existing systems and, perhaps most importantly, security will all require extensive development and testing to prove they are suitable for financial markets.

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