The Tokenisation of Assets and Potential Implications for Financial Markets

Abstract

Asset tokenisation has become one of the most prominent use-cases of distributed ledger technologies (DLTs) in financial markets, for assets including securities (e.g. stocks and bonds), commodities (e.g. gold) and other non-financial assets (e.g. real estate). Tokenisation of assets has potential cross-cutting implications for financial market practices and participants, market infrastructure and regulators across a large range of financial instruments and asset classes. Tokenisation of assets involves the digital representation of real (physical) assets on distributed ledgers, or the issuance of traditional asset classes in tokenised form. A recent OECD report examines the benefits of asset tokenisation and the challenges to its wider adoption. It analyses the potential disruptive effect that a potential proliferation of tokenisation would have on financial mOECD. “The Tokenisation of Assets and Potential Implications for Financial Markets.” OECD Blockchain Policy Series, 2020, 1–62. http://www.oecd.org/finance/The-Tokenisation-of-Assets-and-Potential-Implications-for-Financial-Markets.htm.arkets, and in particular on trading, liquidity, pricing, clearing and settlement. The report highlights the increased importance of a trusted and credible central authority, (such as a custodian) in a tokenised environment to guarantee the connection of the conventional, "off-chain" world, with the blockchain (for example, to guarantee the existence and custody of unique assets backing the tokens). Tokenisation of assets may also involve the possible necessity for a tokenised form of central bank digital currency or stablecoin for the payment leg of security settlement on DLT-based trading venues. The report discusses the conditions that would justify a meaningful transition to a tokenised environment and the markets where a wider adoption of such practices could be envisaged, and provides policy implications of tokenisation for the financial markets. The OECD report highlights that further adoption of DLTs in the financial markets would be incentivised by measurable efficiencies and related cost reductions that are sufficiently large to cover the investment required for the transition to an on-chain environment; increases in safety, resilience and trust; reduction in complexity and disintermediation; by the absence of existing trading infrastructure for the asset or the existence of large inefficiencies in such markets. Wider adoption of asset tokenisation at a large scale might therefore be more easily envisaged in niche markets with limited liquidity and multiple layers of intermediation, such as such as SME or start-up equity and debt financing (e.g. private placement of non-listed securities/participation in private limited liability companies, small-sized issuance of bonds or the tokenisation of private equity/venture capital