Market Data 
I’ve often told the story of when as a junior deputy assistant under-consultant I worked on my very first payments project in a financial institution. On day one I asked what problems we were trying to fix, essentially, and I was told by a grizzled veteran of banking infrastructure they were the same problems as always: payments were too expensive, too slow and too opaque. I wonder if the long arc of my career is at last heading towards a fix for these…
Listen To The Money
At Euro Banking Association EBAday 2024 in Lisbon, I presented a challenge speech on “Digital Money, Digital Assets, Digital Identity: The Future of Banking” in which I said (amongst other things) that decentralised finance is going to dominate banking evolution, that tokens are what the next generation will be using for transactions and that “tokenisation will be driven by money people not technology people”.
That last point is key. My bullish view on tokenisation comes from a fundamentally technical analysis, but for the banking audience much more important is that people who really understand the big picture on financial services have come to the same conclusion and I tend to pay more attention to what they say than what other technologists say.
Speaking at a recent event in London, Sir Jon Cunliffe (a former Deputy Governor for Financial Stability at the Bank of England and a ormer Chair of the Bank for International Settlements Committee on Payments and Market Infrastructures) used an interesting analogy. Talking about the panoply of payment systems we have around us today, he asked how much further these complex systems could be developed to improve performance and to keep up with the increasing digitalisation and automation of our lives.
He compared these systems (what I might be tempted to label “TradFI”) to the piston and propellor engines reaching the ceiling on performance improvements as jet engines were developed. The jet engine, in his analogy, is tokenisation. That is, the development and deployment of digital assets together with the code that governs their use, transfer and ownership (ie, the world of decentralised finance, or DeFi).
In this world, real-world assets become digital tokens that act as a proxy for whole or fractional ownership of those real-world assets. Shared ledger technologies, smart contracts (I know, they’re not smart and their not contracts but I will be guided by the vernacular), and tokens will massively benefit markets by enabling illiquid asset fractionalization by programmatically enforcing the required rules and restrictions, allowing for enhanced mobility of asset ownership, efficient payments and distributions, and a range of financial benefits across the lifecycle of the transactions.
Ready For Take Off
Sir Jon has already forgotten more about financial services than I will ever learn, so I have no hesitation in observing that he is undoubtedly correct and that i agree with him wholeheartedly. But when will this jet engine take off? Actually, I think it is farily soon. A year ago, Bain were already saying that although tokens, smart contracts and digital currencies had “yet to reach true scale” that had quietly started to spread throughout banking with the goals of making banking services faster, less cheaper and more transparent (hence my introudction) as well as improving the overall resiliency of the infrastructure.
Tokenisation is, in short, becoming mainstream.
The Bank for International Settlements (BIS), which is the club of the world’s central banks, have put forward a vision for this infrastructure that they call “the Finternet” (they specialise in money, not marketing, remember). This Finternet (multiple financial ecosystems interconnected with each other, much like the internet) would give people and businesses the ability to transfer any digital asset they like, in any amount, at any time, using any device, to anyone else, anywhere in the world. Financial transactions would become cheap and near-instantaneous.
At the heart of the TradFI sector, The London Stock Exchange Group (LSEG) has drawn up plans for a new digital markets business. Murray Roos, head of capital markets at the LSEG, says that they have reached an “inflection point” where it is “definitely not building anything around cryptoassets” but is looking to use the same technology t to improve the efficiency of buying, selling and holding traditional assets. He says “The idea is to use digital technology to make a process that is slicker, smoother, cheaper and more transparent”. Well, I couldn’t have put it better myself!
The Revolution Will Be Tokenised
Tokenisation is a revolution, a new way of storing and transacting assets to support the needs of wider society. And it might just solve some of those age old problems. Too slow? No, tokens can be swapped between wallets in pretty much real time. To expensive? No, it costs next to nothing to swap data between smart contracts on the internet. Too opaque? Surely one of the key characteristics of distributed ledgers is that they can be inspected, audited and analysed.
While tokenisation has the potential to revolutionise financial services by making markets more efficient, transparent, and inclusive, its ultimate impact will depend on overcoming regulatory, technical, and trust barriers. which I recognise can be a slow process. Having said that, remember that BlackRock’s Larry Fink talked some time ago about the financial sector using the new technologies of digital assets and said that he sees tokenisation as promising because it points to chances of “driving efficiencies in capital markets, shortening value chains, and improving cost and access for investors.”
Indeed it will. The driver for tokenisation is money, not technology.
