BISness podcast - A primer on tokenisation

Added: 2026-05-31

[00:00:01][music] >> Tokenization formally is the process of digitally representing assets such as securities or money on a programmable platform. So, you can think of it as integrating records in a traditional database with the rules and logic governing the transfer of claims.

[00:00:17]>> First, I think it's important to realize that it's still early days and the amount of tokenized assets is still tiny compared to more traditional assets.

[00:00:27]That said, I think tokenization is increasingly viewed, including by the BIS, as a transformative development that can fundamentally change how financial assets are issued, traded, settled, and owned.

[00:00:42]And its importance really stems from two things. One, the efficiency gains that this can bring, and also the new economic possibilities that this can bring, which John also alluded to earlier.

[00:00:53]>> I'm John Frost. I'm head of innovation and the digital economy at the BIS.

[00:00:57]>> And I'm Alan Sutley, speaking from Basel, and you're listening to business, the podcast from the Bank for International Settlements.

[00:01:05]We hear a lot about the concept of tokenization and its potential to revolutionize the financial system these days.

[00:01:12]From streamlining cross-border payments to reshaping securities markets, we're told that tokenization, which is the process of representing real our financial assets on digital platforms, is set to redefine how we manage and transfer assets. But what exactly is tokenization? In this episode, we'll explore how it really works, how it differs from traditional digital transactions, and why it's being hailed as the next big step for finance.

[00:01:38]We'll also discuss the potential benefits such as reducing costs, increasing transparency, and improving financial inclusion. And we look at the challenges it brings, such as how to ensure security, trust, and regulation amid rapid innovation. With me today to discuss these issues are Morten Bech, head of the BIS Innovation Hub Swiss Center, and John Frost, head of Innovation and Digital Economy at the BIS. Welcome both. It's a pleasure to have you here today.

[00:02:05]>> Thanks a lot. Great to be here.

[00:02:06]>> Thanks a lot. Yes.

[00:02:07]>> So, let's kick off with defining our terms here, John. Just what is tokenization and how does it work?

[00:02:13]>> Yes, always good to define terms. So, tokenization formally is the process of digitally representing assets such as securities or money on a programmable platform. So, you can think of it as integrating records in a traditional database with the rules and logic governing the transfer of claims. So, you have not only information about the asset itself, like what it is, where it comes from, and who owns it, but also what can and cannot be done with that asset. That matters because it enables the contingent performance actions. So, something only happens if a certain condition is fulfilled. That allows for automation and all sorts of other new capabilities.

[00:02:48]>> Okay, so Morten, then can you elaborate a bit on what types of assets can be tokenized and how does it benefit them?

[00:02:54]>> I would say that any asset in principle can be tokenized, but some lend themselves more to it than others.

[00:03:02]Tokenization basically involves recording asset holdings in a different type of database than the ones that we use today. These types of databases are called distributed ledgers or blockchains. A key benefit is that everyone can have a copy of the database, and that eliminates the need for reconciliation. Today, financial institutions spend a lot of time sending messages back and forth to confirm that what they see in their systems is the same as their counterparts sees in their systems.

[00:03:33]>> I see. So, then can you talk us, John, then through the difference between tokenization of assets and tokens like cryptocurrencies?

[00:03:43]>> Sure. So, both cryptocurrency tokens and most live tokenized assets today circulate on public permissionless blockchains. So, Morten mentioned distributed ledger technology. There are many different types of distributed ledgers. Tokenized assets entail a claim on some counterparty. They are someone's liability.

[00:04:00]Whereas cryptocurrencies like Bitcoin and Ether are no one's liability. They have no underlying or backing assets and they serve as digital tokens for the operation of that specific blockchain network. Their value is maintained by technologically determined scarcity and by the demand of users to hold them.

[00:04:17]Whereas with a tokenized asset, the value is determined by what's actually on the other side. So, in that sense, there is an important economic difference between cryptocurrency tokens and tokenized assets.

[00:04:27]>> Okay, and Morton, you alluded to this a little earlier, but can you elaborate a little bit more on why tokenization is actually important for the financial system?

[00:04:36]>> Yes, I can. Well, first, I think it's important to realize that it's still early days and the amount of tokenized assets is still tiny compared to more traditional assets.

[00:04:47]That said, I think tokenization is increasingly viewed, including by the BIS, as a transformative development that can fundamentally change how financial assets are issued, traded, settled, and owned.

[00:05:01]And its importance really stems from two things. One, the efficiency gains that this can bring, and also the new economic possibilities that this can bring, which John also alluded to earlier.

[00:05:12]>> So, John, you you spoke about the differences between tokenization and tokens such as cryptocurrencies, but can you explain then also the difference between tokenization and what makes it different from traditional digital transactions?

[00:05:27]>> Right. So, today already many financial transactions already take place digitally in digital databases, but they don't take place on a programmable platform. So, when we're talking about tokenization, we're talking about the recording of claims again on a programmable platform. And that can be public permissionless blockchains, it could also be private permissioned networks, or you know, other variants.

[00:05:47]But the use of this programmable platform means that transactions with tokenized assets can be automated, and that can allow for things like atomic settlement where all the parts of a transaction are done at once or not at all. It's atomic in the sense that it can't be split. And, of course, we all know from physics that atoms can in fact be split, but let's uh let's not split hairs here. So, a traditional digital transaction involves multiple updates to different ledgers with messaging systems and reconciliation, as we're discussing before. But, a tokenized transaction does all of this at once in one fell swoop.

[00:06:16]>> Okay, and this brings us then to the concept of the unified ledger. And, how does this relate to tokenization, Morten?

[00:06:23]>> Well, so the the unified ledger is the BIS's version of vision uh of a programmable platform that contains not only tokenized assets, but also tokenized commercial and central bank money to enable seamless um settlement of transaction. Importantly, it's about unifying different types of assets and not unifying different ledgers.

[00:06:46]>> So, what we haven't mentioned yet is the role of central banks. And, presumably, they will be key to the development and regulation of tokenization, John.

[00:06:55]>> Yeah, certainly. And, a lot of central banks are actively experimenting with tokenization. And, importantly, they're often collaborating with the private sector. I think this is quite unique in this space. We see a lot of examples of joint experimentation between the public and private sector. They're working together to better understand the technology and its potential. And, in some cases, central banks are considering the types of programmable platforms that they could build. Uh that could be with tokenized reserves, which allow for ultimate settlement on central bank balance sheets.

[00:07:23]But, it could also be through new types of programmable platforms that allow both the public sector and the private sector to build new applications on top.

[00:07:31]And, there are many projects by the BIS Innovation Hub that are looking into specific applications in different markets. But, of course, central banks are also being asked to step up as regulators and determine the rules of the road for tokenization. And their job isn't easy.

[00:07:45]They have to strike the right balance between fostering innovation and continuing to ensure financial stability.

[00:07:50]>> Morton, one of the touted benefits of tokenization is that it will make cross-border payments faster and more efficient. Could you elaborate a little bit on this?

[00:08:00]>> Tokenization can enable peer-to-peer transfers over long distances, which are often faster and cheaper than traditional rails.

[00:08:09]Today, you can send value to a friend say in Argentina in a matter of seconds.

[00:08:14]However, such transfers are not always safe for the sender, the receiver, or society due for example to the lack of anti-financial crime controls, price volatility, or the inability to reverse a transaction.

[00:08:29]>> Okay, and I know one of the areas that the Innovation Hub is working on in this regard is Project Agora. So, how does this aim to use tokenization to improve the financial system?

[00:08:39]>> Right. So, so Project Agora is really about reimagining wholesale cross-border payments using tokenization. So, today cross-border payments involve a series of steps, and if one step fails, you need to unwind all the previous ones.

[00:08:54]Let us say that the receiver's name is misspelled and you get all the way to the end of this long chain, then you have to reverse all the steps that happened before.

[00:09:03]And the steps to unwind, due to the nature of the business, are often manual, which makes them costly and and time-consuming.

[00:09:11]So, using the programmability of tokenization, Agora aims to do all these steps together using what John mentioned earlier as atomic settlement. And hopefully this will make wholesale cross-border payments faster, cheaper, and safer.

[00:09:25]>> [snorts] >> And I And there's a video on the from the recent BIS Innovation Summit where I tried to explain all this.

[00:09:32]>> And John, Morton alluded to this earlier, the safety of tokenized assets.

[00:09:36]Are they safe from fraud and cyber threats?

[00:09:39]>> So, I can give a very clear nope.

[00:09:42]So, as with any digital financial service, and in fact, any financial service more generally, we have to be attuned to the potential for fraud, scams, and cyber threats.

[00:09:52]It's sometimes claimed that public blockchains are more secure than other systems because there is a repeated copy of the ledger in multiple locations, and certainly that's true, that's all well and good, and it does generally prevent double spending, but it doesn't necessarily help against fraud and scams. Those are rampant in the crypto space, as we all know.

[00:10:11]And worse yet, if a case of fraud or scam occurs, you know, it's generally impossible to reverse a transaction or to recover the funds. So, of course, central banks and regulators need to be very aware of this when writing rules.

[00:10:23]We need to understand what is possible and what isn't possible with the technology, and as elsewhere, we need to have smart efforts to really combat fraud and cyber threats, and make sure that safety and integrity can be maintained.

[00:10:36]>> And Morten, we'll give the last word to you. So, what are the challenges or risks you would associate with implementing tokenization on a large scale?

[00:10:46]>> How much time do we have? Uh let me use uh Acora as an example. To improve cross-border payments, it stands to reason that you need multiple jurisdictions.

[00:10:56]Moreover, cross-border payments often involve both commercial and central bank money, so you need both participation from the private and public sector.

[00:11:05]In Acora, we ended up with seven central banks and over 40 financial institution.

[00:11:10]Then you must get this diverse group to walk towards a common goal without breaking up.

[00:11:16]Hopefully, at the end of the journey, you have demonstrated the feasibility of your new approach, and then you can start working on ensuring that the solution is viable and implementable in real life.

[00:11:28]The latter task is actually bigger than the first ones that I mentioned. So, I think that gives you an idea of the complexities and the risk involved.

[00:11:36]>> It does, for sure.

[00:11:37]>> [music] >> We'll have to wrap it up there, but thank you Morten and Jon for that very insightful primer on the role of tokenization in the next generation monetary and financial system. And thanks also to everyone for listening.

[00:11:49]You can find out more about the topics discussed [music] today on our website bis.org.

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