Tokenisation and new technologies are to post trade what the internal combustion engine was to travel in the 19th century, says Sasha Mills. In her speech at the recent Tokenisation Summit in London, the executive director for financial market infrastructures (FMIs) at the Bank of England (BoE) put the spotlight on how innovations in the sector are reinventing the finance industry.
In the late 1800s, travel was transformed with the advent of the first commercially successful combustion engine. Similarly, says Mills, “Digitisation has been the combustion engine of financial markets, transforming paper-based systems of the 1960s and 70s to computer-based activity, on to the digital systems of today.”
Although the implementation of programmable ledgers and tokenisation is still “at the experimental or early adoption stage”, the industry anticipates that they could “in time bring about better outcomes”.
From the top down
Mills acknowledges that “public authorities have a role to play in the reinvention of wholesale financial markets, both as enablers of innovation and providers of public infrastructure, and as regulators to ensure adoption happens in a way that preserves financial stability and is safe for participants in these financial markets”.
With that in mind, she gave an overview of some of the BoE’s work in the space, including the UK’s digital securities sandbox (DSS), digital money, as well as programmable ledgers and tokenisation.
The last – programmable ledgers and tokenisation – is particularly of interest right now, as can be observed by the “increasing amount of investment in the application of distributed ledger technology (DLT)”. That’s because “there is a ceiling to the efficiency that can be achieved using legacy technology”, which is sequential, and often manual.
Opportunities abound
“The tokenisation of securities on distributed ledgers – digital securities – offers the potential to merge trade and post-trade functions, shortening settlement cycles and offering more programmability and automation in financial transactions. This could introduce more liquidity to a wider range of financial assets, and provide opportunity for more assets to be utilised.”
Mills cautions, however, that if left unchecked, such innovation and exploration might lead to market fragmentation, which might, in turn, trap liquidity. “The importance of facilitating the transfer of information such as records of ownership, or forms of money between distinct platforms and ecosystems, will continue to serve as one of the key pillars of success in an increasingly digital financial system.” Achieving interoperability is thus important.
