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It might evoke thoughts of a voucher to be exchanged for a drink at a wedding or a chip to be used in a seaside slot machine, but anyone working in finance or data security is going to be hearing a lot more about 'tokens' in the very near future.
After a tokenisation milestone was recently achieved by a firm called Ctrl Alt with the help of a Channel Islands law firm, Express took a closer look at what the trend is all about...
Tokenisation is the process of swapping important data – such as credit card details or real currency – for a substituted ‘token’ which can then be shared quickly and with less risk.
You are essentially representing ‘real’ money or assets with a token.
This process utilises blockchain technology, which is fast becoming the go to for seemless, speedy and safe transference of data within and between large businesses and individuals.
Pictured: The JFSC says it is getting an increasing number of queries about tokens.
These new technologies are being utilised by larger mainstream financial institutions as they allow assets to be transferred quickly via tokens, as opposed to the historically slow process of transferring funds between international bodies.
Tokenisation can also give access to previously ‘illiquid’ assets and brokers the relationship between traditional currencies and digital ones.
Jersey's regulator said in a recently published report focused on sector innovation that it had seen an "increasing number of both enquiries and applications for tokenised RWAs (real world assets), with areas of interest being the tokenisation of real-world equities such as Tesla and Amazon, tokenised bonds and tokenised funds".
From a regulatory perspective, the JFSC explained that tokenised RWAs are treated differently to virtual assets, which have their own definition, and they are also different from NFTs (non-fungible tokens). The latter is because tokenised RWAs "are more likely to be fungible and a replication of an existing financial asset, rather than an altogether new asset class".
While a guidance note is still being prepared to assist businesses in filing applications, the regulator said it was treating applications with exposure to tokenised RWAs "on a case-by-case basis and typically taking a substance over form approach".
"There are currently no plans to roll out a specific regime for tokenised assets," the regulator added, "We prefer to understand how these assets map against our existing regulatory framework while acknowledging the specific nuances of assets held on blockchains and the mechanics of smart contracts."
The Guernsey Financial Services Commission (GFSC), meanwhile, published a policy statement on tokenisation last month.
“The Commission supports innovation and recognises the role tokenisation could play in improving efficiency within capital markets,” the GFSC said.
“The Commission is aware of growing interest, locally and internationally, in the application of this technology within the funds sector and this is an area of focus for fund regulators globally.”
The GFSC supports the pursuit of these kinds of processes as long as it sits within the law.
“The current Bailiwick regulatory regime permits fund tokenisation, i.e. the register of holders of units in a Bailiwick registered or authorised collective investment scheme may be maintained by using distributed ledger technology and tokens issued as a digital representation of the ownership of such units. It should be noted that:
the collective investment scheme would still be required to comply with the provisions of the Protection of Investors (Bailiwick of Guernsey) Law, 2020 and the applicable underlying fund rules.
the licensed Designated Administrator of the collective investment scheme would also remain responsible for administering the scheme in line with applicable law, including the Proceeds of Crime regime. (In that respect a private, permissioned blockchain would be required to be used, under the control of the Designated Administrator.)
a token issued specifically as described above would not constitute a virtual asset for the purposes of the Lending Credit and Finance Law (Bailiwick of Guernsey) Law, 2022.”
The GFSC’s stance was seen as a positve one and offshore law firm Bedell Cristin said in May that “the commission's statement adds welcome clarification, showing that Guernsey is open to the kind of innovation that tokenisation can represent, while drawing a helpful line between allowable tokenisation, and areas where it believes that there is significant risk, including crypto and virtual asset issuances to retail investors”.
Very recently, the first tokenisation of capital within a Guernsey framework has been completed via a partnership between Ctrl Alt and a UK Bank, with support from Carey Olsen.
It has enabled institutional investors to access investment in a debt transaction, a pioneering move developed by Ctrl Alt, a business-to-business infrastructure firm with expertise in financial engineering.
The process was hailed a milestone by Carey Olsen, who said: “[It] underscores the increasing demand from financial institutions for tokenisation solutions. Notably, most recently, BlackRock, the world's largest asset manager, unveiled its tokenised money market fund, emphasising the institution’s trajectory towards innovation aided by tokenisation."
“The burgeoning opportunity in this space shows no signs of slowing," Carey Olsen added. But what is it worth?
According to a paper commissioned by Jersey Finance, with research ch from Boston Consulting Group and investments platform ADDX, the market is expected to see a 50-fold increase between 2023 and 2030.
It suggested the overall business potential in tokenising global illiquid assets by 2030 could be worth between $16 trillion and $69 trillion.
Looking ahead, "there’s no doubt that tokenisation will continue to play an important role in financial services," opined CEO and Founder of Ctrl Alt, Matt Ong.
"At Ctrl Alt, we’re seeing an increase in institutions looking to utilise the benefits of tokenisation across various sectors of their business... Our recent tokenisation for a UK Bank with the help of structuring via Guernsey with Carey Olsen showed the increasing use case for tokenisation within financial institutions.”
The flexibility of Guernsey’s Companies Law allows for tokens to be regulated as ‘ordinary securities’ which Carey Olsen Partner, Matt Brehaut, says puts Guernsey in a good place to “benefit from the tokenisation revolution”.
Pictured: Founder of Ctrl Alt, Matt Ong.
"Ctrl Alt's market-leading work on this first structuring looks set to pave the way for tokenisation to become mainstream very soon, which is great news for Guernsey," continued Managing Partner, Tom Carey.
"We hope to see it become the jurisdiction of choice for tokenised structures."
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