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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is chief executive of corporate and institutional banking at HSBC
Tokens have so much power to reshape the financial ecosystem over the next decade.
Some sceptics might ask what the point is of using these digital representations of assets or money. After all, there are systems in places such as the UK, EU and India that allow for near real-time electronic payments. But it’s a bit like asking the question: what’s the point of 5G telecoms services when you have 4G?
Look at how tokenisation is already changing finance. Cryptocurrencies were the first examples of such money — digital tokens that allow payments between parties without the need for an intermediary. However, their value has been volatile. Stablecoins pegged to assets are a more recent, more stable form of tokenised money. Another type is tokenised deposits — digital representations on a blockchain of a customer’s deposits held at a commercial bank. Central banks developed digital currencies from this ecosystem. Mainstream tokenised assets are also emerging — covering bonds, gold, money market funds, real estate and private equity among other things.
In theory, anything can be tokenised using blockchain or distributed ledger technology and given a monetary value based on market demand. That does not mean everything should be. How many of the 13mn memecoins issued last year are likely to be of any value in the years to come?
But tokenised money opens the door to instant payments — not just domestically but internationally. It can facilitate the rapid movement of money across borders, be it overseas workers sending remittances home or consumers making payments for goods and services. Tokenised money is also programmable, which moves its use case beyond speed to offer better functionality, automation and user experiences. It moves money from being a transfer of value to automating how, when and under what conditions it can be used.
“Digitally native” bonds are a good example of the benefits. While dealings in traditional bonds can take days to settle, the process is near-instant for tokenised bonds, reducing risk and tied-up capital.
Using such an infrastructure, the investor could then use those same bonds as collateral for financing purposes on an intraday basis (even for a few hours) rather than overnight in a typical sale and repurchase transaction. Tokenisation also improves distribution options through fractionalisation (digitally slicing the asset into smaller parts), which reduces the minimum investment size. In addition, the programmable nature of tokenised bonds can reduce operational complexity.
International trade could also benefit enormously if it embraced tokenisation for bills of lading, invoices and trade finance itself, while embedding programmable smart contracts (for example, to ensure payment will be made automatically when goods are received).
But what are the obstacles to this future of finance? Investment and infrastructure build is obviously necessary, including new platforms and data centres. Significantly, interoperability is key too, as that would enable scalability of tokenised money such as deposits.
Standardisation of regulation and consumer adoption is critical to this and there has already been much progress on this in different jurisdictions. In Hong Kong, stablecoin operators must be licensed if they want to issue stablecoin (and HSBC has been granted one of the first two licences), so they operate within the financial system, and the consumer is protected. In the US, stablecoin operators are now regulated under a federal framework with the aim of making them part of the mainstream financial system. In the UK, the Bank of England has proposed that sterling-denominated stablecoins used for retail payments are backed by high-quality liquid assets.
For commercial banks, tokenisation is not without challenges to existing business. But there will be opportunities. Tokenised deposits are a natural choice and are already being used within the financial system to move money on a 24/7 basis. There is potential for this use to substantially increase, given the size of current commercial deposits and similar instruments at more than $100tn. This compares with the $310bn of stablecoins in circulation.
And more generally, tokenised money and assets will drive operational efficiencies and cost savings for companies and consumers. The 5G moment for the financial ecosystem is arriving.
