Interest in the use of blockchain or distributed ledger technology across financial services has grown in recent years, especially in relation to tokenisation. A flurry of public and private sector initiatives, as well as regulatory reforms, is in motion and these projects are setting the stage for a fundamental shift in how markets operate.
In ‘Markets 3.0’ – a landscape with new forms of digital money and assets – this shift could deliver quicker, safer and automated settlement, 24/7 availability, greater transparency and traceability and, where appropriate, a reduced role for intermediaries. These benefits and a range of new payment use cases can be unlocked through new technology underpinning tokenisation, such as smart contracts and programmability in addition to a unified ledger.
Switzerland, Brazil, South Korea and Singapore have all demonstrated the importance of public-private partnership in developing the financial market infrastructure needed to capitalise on the potential of tokenisation in financial markets. After all, innovation requires collaboration. It is crucial to connect the dots across the various initiatives to ensure a holistic approach that delivers on innovation and benefits the wider ecosystem of market participants and end users.
How can this vision be brought to fruition?
First, assets need to be tokenised. This involves converting traditional securities into digital tokens that can be easily issued, traded and settled on blockchain-based platforms. This reduces the time and cost associated with these processes, opening new opportunities for asset classes and investment strategies. Investors are particularly interested in tokenised alternative assets.
Second, programmable and tokenised money must be developed, whether that is retail or wholesale central bank digital currency, tokenised commercial bank money or private stablecoins. The tokenisation of money and assets can enable delivery versus payment, which allows transfers to happen at the same time or after payment has been made. This functionality can be applied to a huge number of use cases across retail and wholesale finance, offering significant benefits.
Third, regulators must develop a robust regulatory framework that balances innovation with market stability and consumer protection. The UK Treasury has set out a future regulatory regime for cryptoassets in the UK for this reason. The development of such a framework requires a deep understanding of the technology involved and a willingness to collaborate with industry participants to develop appropriate regulations.
Finally, new types of FMIs built on blockchain are needed to help facilitate the transaction of both tokenised money and assets. This could involve single networks with multiple participants or linking different networks together. These FMIs could look like the ones we have today, where money and assets are segregated. There is also a potential to create new FMIs where both tokenised money and assets sit on the same ledger. Some examples include the Regulated Liability Network in the UK, Regulated Settlement Network in the US, Project Helvetia in Switzerland, Drex in Brazil and Project Agorá, which spans seven countries..
The future of money and payments, and financial markets more broadly, is unfolding at pace. The innovations we see today are the harbingers of a new era where finance is more accessible, efficient and interconnected than ever before. Policy-makers and industry professionals should embrace this change and consider how they can actively shape its course.
Ollie Carew is Senior Manager of Fintech and Fran Clausen is Global Regulatory Network Strategy Lead at Ernst & Young LLP.
This article featured in the Digital Monetary Institute Journal, summer 2024 edition.
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