Conversations around tokenisation have been ramping up over the last six to nine months, according to speakers on the ‘Promise of Tokensation’ panel at this year’s International Derivative Expo conference, and a number of promising use cases are already being adopted. However, there is still a lot that needs to be done for the technology to be fully integrated in the industry.
Considering the evolving focus of the digital assets space, Helen Hartwell, global head of exchange traded derivatives client consulting at UBS, noted that interest has shifted from DLT to collateral tokenisation use cases. More tangible examples of how blockchain technology can be used are emerging, she shared, with margin processes being automated and decentralised digital ledgers allowing for risk reduction and a move towards near real-time settlement.
Looking ahead, Hartwell warned that tokenisation is not one-size-fits-all. Not all are willing or ready to move to this new model, she added, stating that there are a variety of reasons for firms to move to this technology – or stay as they are. “There needs to be a gradual, iterative solution rather than a big bang move to tokenised assets,” she affirmed.
“I’m really excited about tokenisation use cases in the clearing space,” stated Eileen Herlihy, managing director at JP Morgan Securities. The technology could accelerate the process of getting collateral back from clearing houses, an exercise that can currently take up to five days thanks to the persistent use of fax machines at some organisations. “If clients had more certainty about collateral mechanisms they would be more esoteric with their postings,” she added.
JP Morgan is already using a tokenised collateral network (TCN) on its Onyx blockchain platform, shared Herlihy, noting that offering a network rather than a direct transfer is crucial in the collateral space; “it can’t stay static, the dealer needs to be able to reuse it”, she said.
Tokenisation could improve trades between different entities and settlement cycles, she continued, adding that a number of use cases need to be established to bring in as many participants as possible. There needs to be a two-way market, she explained, with demand to both receive and post digitised collateral.
Commenting on abrdn’s work with tokenisation, senior investment manager Duncan Moir discussed the firm’s use of the approach to improve user experience, tokenise underlying securities in addition to funds and offer greater flexibility in how to invest. Using blockchain, abrdn aims to reduce operating costs and remove administration costs for capital allocation, he continued, eliminating barriers to entry.
The firm has already tokenised money market funds and expects to launch further tokenisation projects over the next year, including repo and gilt funds. “We started looking at tokenisation of private market assets, real assets and funds, and we do firmly believe that there is a use case in the future, but it’s going to be years in the making,” Moir shared. “We’re a long way from there in terms of scale.”
Barriers
As with any new technology, there are several barriers to adoption. Sandeep Sasikumar, vice president at BlackRock, shared a few, naming scaling, budgetary restrictions and the fragmentation of post-trade processes as particular issues.
On budget priorities, “GenAI has taken over everyone’s resources and time,” Moir said. “Blockchain has been around a long time, but we haven’t invested enough in it because it’s clunky foundational tech.” However, this technology is going to have more of an impact on the bottom line than the flashier AI, he argued, and deserves greater attention.
“Tokenisation shouldn’t be an island,” Herlihy added, advocating for the technology to be used alongside other recent innovations and become part of the broader ecosystem.
What next?
Looking ahead, “change cannot be done in isolation,” Sasikumar stated; consideration must be given to how a new type of technology impacts liquidity and trading, and how it fits into regulatory requirements.
However, as more use cases are discussed and interest continues to grow, solutions will be engineered that offer meaningful benefits and suit the demands of regulators, he concluded.
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