Challenges and opportunities in asset tokenisation
The OECD has released a comprehensive report examining the current state of asset tokenisation and blockchains or “distributed ledger technologies” (DLTs) in financial markets. (Here’s a good explanation of the difference between tokens and cryptocurrencies, including potential use cases.)
The OECD’s analysis explores potential benefits, risks, and obstacles hindering widespread adoption of tokenised assets.
Key Takeaways
The main potential benefits identified in the report are:
- Improved efficiency through automation and disintermediation
- Enhanced transparency and liquidity
- Faster clearing and settlement processes
- Programmability of assets and transactions
At the same time, there are quite a few challenges:
- Lack of liquidity and established ecosystems
- Absence of proven, measurable benefits at scale
- Need for integrated payment rails and wholesale CBDCs
- Complexities around instant “atomic” settlement
- Limited availability of custodial services for digital assets
- Interoperability issues between different DLT networks
- Lack of standardized identification solutions
- Unresolved legal and regulatory questions
The Tokenisation Conundrum
Despite growing interest from market participants, the adoption of tokenised assets remains limited. Most activity is confined to pilot projects and small-scale experiments. The report identifies several factors contributing to this slow uptake:
Chicken-and-egg problem: Without sufficient liquidity, investors are hesitant to participate. Yet without investor participation, liquidity cannot develop.
Infrastructure costs: Transitioning to blockchain-based systems requires significant investments. These are difficult to justify without clear, proven benefits.
Settlement challenges: Instant “atomic” settlement offers advantages but disrupts existing market practices and may not be desirable for all participants.
Custody concerns: The role of custodians in onboarding assets and investors to blockchain platforms is crucial but underdeveloped.
Technical hurdles: Interoperability between different blockchain networks and with legacy systems remains a complex challenge.
Regulatory Considerations
The report emphasizes that tokenised assets should comply with existing regulatory frameworks under the principle of “same activity, same risk, same regulation.” However, it also acknowledges that blockchain-based finance may introduce new risks requiring additional policy considerations.
Looking Ahead
While asset tokenisation holds promise for transforming financial markets, significant obstacles must be overcome before widespread adoption can occur. The report authors provide valuable insights for policymakers, regulators, and market participants as they navigate this evolving landscape.
As the technology matures and regulatory frameworks adapt, we may see increased momentum in the tokenisation of assets. However, this will likely be a gradual process requiring collaboration between public and private sector to address the various challenges.
The entire report can be found on the OECD website.
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