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A Multi-Asset Approach to Tokenisation

This paper examines the proposition put forward in Tony McLaughlin’s paper ‘The Regulated Internet of Value’ and considers the practical implications of a generalised approach to tokenisation of regulated liabilities.  To map a practical way forward, the paper starts with where we are and looks at the landscape in front of us.

We have, throughout, polled several key influencers to comment on their experience so far and to give their perspectives of the path ahead.  Our conclusions are added to theirs and we finish with a number of recommendations and points of guidance for those who have an interest in shaping the outcome in this important transformation.

How we own things today

The section details the way in which the ownership of cash and corporate liabilities are currently structured – through a chain of intermediaries both in payments and capital markets   This is the starting point for any transformation. 

How to build a regulated internet of value?

The section explains how we can address the format war of account-based vs token-based and transform the industry with a tokenised multi-asset ledger architecture. We explore the key problem statements that the solution needs to cater to, irrespective of the liability or asset type.   The blueprint and the key attributes of DLT based multi-asset ledger is discussed with an aim to establish a globally scalable solution. We recognise that the momentum necessary for this transformation is building up, the technology has been tested and regulation is moving towards achieving the end state of this vision. The time to act is now.

Why is DLT making a difference?

The note then examines the technology of tokenisation, highlighting the differences between public and private blockchain ledgers.  It resolves that although public blockchains hold out a promise of decentralised governance, they are controlled by a small number of mining pool operators who are generally not subject to the same sort of regulatory oversight as traditional ledger operators.   The conclusion is that regulated DLT benefits from regulatory oversight where public nonregulated blockchains do not.

The wallet and instant settlement

Notwithstanding that analysis, growth and innovation are centred on public DLT/blockchains. In analysing the growing popularity of tokens on public DLT/blockchains, the paper concludes that it derives to a number of features of DLT such as always-on, atomic and easily accessible, which users find attractive.  They include the ability to create and operate a wallet as a way or owning and transacting tokens.  The authors notes that no permission is required to create a wallet and it is not ‘owned’ or ‘granted’ by any institution but belongs to the wallet holder.  Second, the authors propose that the homogeneity of the process and real-time settlement are drivers to adoption.

Making it work together

Next the paper addresses the challenges of interoperability between different DLTs/blockchains.  There are a number of emerging technologies that are viable platforms for tokenisation that would practically have to work together.  There is also a considerable community of potential participants who give and receive instructions via SWIFT messaging who will require backward compatibility.  The paper concludes that practical interoperability is broader than having different blockchains talk to each other – it includes regulatory, legal and even geo-political aspects. It also concludes that any realistic interoperability strategy should embrace backwards compatibility.

Meanwhile for the utility of public blockchains to exist within a framework that offers the same good governance as private blockchain and it would seem there are a number routes:

a)     Find a way to create a new global network which is accessible to everyone and is subject to some form of acceptable governance

b)    Steer the public blockchains into a more acceptable form of governance

c)     Encourage and enable private companies to innovate in a way that realistically competes with the public blockchain model

Creating a digital identity

The final topic covered is parallel advances in identity technology and in particular, verifiable credentials.  For tokens to work, at scale, in a regulated world, identity needs to be digital. It makes sense for the digital wallet to be the home for a user’s identity and credentials and for their deployment to be a matter for individual control.

The way forward

The authors finish the paper with a roadmap.  This section catalogues practical steps and considerations that can move the financial services industry from where it is towards an internet of value.  The map proposes starting with understanding where we are and the nature of the technology that is driving the growth, continuing with considerations of new risks and operational requirements and finishing with the need for a coordinated approach to change from the regulators and the private sector. 

The final word is an encouragement to participate.  DLT and tokens are a fast growing area.   Doing nothing may, ultimately, prove to be the riskiest strategy. 

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