Market participants hope to speed up settlement and collateral transfers with digital tokens recorded on the blockchain.
Imagine an integrated ecosystem in financial markets, where every real-world asset is also represented by a digital unit or token. That token could be utilized and transferred more efficiently than the physical asset, introducing additional transparency, 24/7 liquidity and instantaneous settlement to the investment lifecycle.
The concept of digitalizing ownership rights, in a process known as “tokenization,” is the latest hot topic sweeping the boardrooms of brokerages, fund-management companies and banks. Some see it as having the potential to reduce operational costs and minimize the number of market venues and intermediaries needed in capital raising.
Tokenization could also reshape the investing landscape by connecting up issuers to a more diverse set of buyers and sellers, who may consider fractions of assets more attractive and affordable.
Here’s how tokenization works: the digital token references someone’s right to property or delivery of an asset. Ownership changes are recorded on an unalterable, shared digital ledger called a “blockchain,” similar to the infrastructure underlying cryptocurrencies like bitcoin and ethereum.
The potential benefits of tokenization are significant — both pre-trade, for issuers who could save money by removing layers of friction in their normal workflows; and post-trade, where the technology could be used for efficiencies in things like collateral transfers and trade reconciliation.
Distributed ledger technology (DLT) has digital signatures in it that govern the transfer of token ownership and allow peer firms to exchange value directly. These trades are recorded as distinct events on the blockchain. Then issuers, as well as other eligible participants in the transaction, can use it to see who owns what — and any movement in the chain — simultaneously, in near real time.
“We’re not reinventing the capital markets wheel,” says Timothy Furey, CEO of ConsenSys Digital Securities, a registered broker dealer for tokenized securities. “We are using technological innovation to provide enhanced capabilities and advanced features to products that issuers/investors already know and understand.”