Can tokens take the agony out of housebuying?

Blockchain could transform financial transactions as money moves at ‘the speed of light’. Tokenisation is now the City of London’s new buzzword

Homebuyers are all too familiar with the agony of completion day. Calls fly back and forth between estate agents and solicitors to see if funds have moved up the chain. Only once the money has landed in everyone’s bank accounts will the sought after keys be released. That pain may soon be a thing of the past under new plans to digitise payments: so-called tokenisation — the new buzzword in financial circles.

If implemented, the technology could revolutionise not just housebuying but payments between buyers and sellers of all stripes. It could even enable consumers to buy assets in fractions — a slice of a gold bar, for example. Trade body TheCityUK reckons London needs to be a leader in tokenisation if it is to maintain its status as a top financial centre. In a recent report with professional services firm PwC, it predicted that tokenised assets would become the “default way in which securities and assets are traded” — and warned there was a risk of regulation falling behind.

At TheCityUK annual dinner last week, chair Omar Ali warned guest speaker Lucy Rigby, the City minister, other countries were “going faster” in the race for digital supremacy, particularly the US, the United Arab Emirates, Hong Kong and Singapore. “This is fantastically important because it’s the future of the industry,” Rigby acknowledged.

So what is tokenisation, and what does it mean for you and I? Some see it as merely the latest iteration of City share trading. Young men once used to run around the Square Mile distributing pieces of paper to show share transactions. In the 1980s, this was replaced with electronic bank transfers.

A building, a real asset, could be represented by 1,000 tokens

Tokenisation tends to use blockchain technology — a type of decentralised digital ledger that is perhaps better known as the basis for cryptocurrency. “A blockchain is a type of database for record-keeping,” said Kara Kennedy at JP Morgan. “Today [in securities markets] record-keeping is maintained on ledgers held by centralised institutions; a blockchain is a decentralised ledger that enables transfers to take place peer-to-peer.”

In effect, this decentralisation removes the need for a main repository like a central bank. But what, then, is a token? “Tokenisation is essentially the representation of an asset or value on the blockchain.

That’s its simplest form,” said Kennedy, who is based in Edinburgh and is global co-head of the American bank’s blockchain business, known as Kinexys. So why does it matter? After all, the Bank for International Settlements, the central bankers’ bank, points out people have been transacting in tokens for centuries, citing the Chinese use of seashells as a form of currency 3,000 years ago.

But this new form of tokenisation is more sophisticated than modern money. For instance, digital tokens are programmable, which means you can set conditions for when money is released. Sasha Mills, the executive director of financial markets infrastructure at the Bank of England, explained the ramifications: “If I’m standing on my doorstep, waiting for my online shopping, the money doesn’t go through until I’ve got the goods in my hand.”

Manish Kohli, head of HSBC’s global payments solutions business, said that, with tokens, money could also “move at the speed of light”. Speaking from New York, he explained that assets could be broken up into tokens to make them more affordable — like the tower he was sitting in. “This building, a real asset, could be represented in 1,000 tokens, say, which can be sold to individuals,” he said. In Hong Kong, HSBC is using the concept to give retail customers access to gold. “Gold is very clunky to own because it’s heavy, it’s difficult to transport,” he said.

With this new technology, customers could own a digital token representing a fraction of that gold. In the financial markets, tokenisation could also enable more efficient borrowing. Kennedy said: “If a company has cash coming in at midday but needs to borrow for two or three hours until it arrives, you can use a blockchain-based intraday loan to borrow for a certain period of time.” That period could be as short as hours or even minutes. Mills at the Bank of England pointed to the use of tokenisation in posting collateral — a sort of guarantee for a transaction.

She believes it could help facilitate growth in the economy, as the same collateral could be put up to support a larger number of transactions. “I can programme my money so I can use my collateral for a few hours in a jurisdiction,” she said. “It’s very efficient, which is obviously beneficial for growth.”

But the City is clearly racked with anxiety that Britain is falling behind in the race to harness digital assets, especially after President Trump published an act last year to set out rules for dollar-denominated stablecoins (a type of cryptocurrency backed by a traditional currency). As the name suggests, their value is supposed to be more stable, unlike cryptocurrencies such as bitcoin, which float freely; last week bitcoin suffered another sharp fall in its value. These are different to the “tokenised deposits” that, for instance, a high street bank would use.

The Bank is consulting on a regime where it would stand behind stablecoins issued in pounds. Mills said: “For stablecoins to operate in the UK, in sterling, they need to meet the standards of money. What we’ve done is to say that if it looks and smells like money, we need to ensure it operates like money; we will be a banker to those stablecoins.”

She was talking about stablecoins for everyday usage, not ones to buy crypto. “From the Bank of England’s perspective, we want all money to be trusted and robust, regardless of whether it’s a digital form of something, a traditional form or a new form.” She took issue with the suggestion the UK was falling behind.

While Trump’s act has been published, the details are still being worked through. Mills said there would be a “live regime” for stablecoin issuance here by the end of the year. The Bank is running a sandbox regime — where market players can test their ideas without risk of punishment when things go wrong — for other digital issues. It has already tested the idea of using tokens to speed up housebuying through tests with the Land Registry.

The financial industry is also running the Great British Tokenised Deposit project, led by UK Finance, and in the summer will begin to test remortgaging, peer-to-peer transactions and digital bond settlement. And the government is working on a digital gilt, known as a “digit”, which Rigby hopes “is going to catalyse the use of some of this technology”.

Announcements on this project are expected in the next week. But the City’s frustration is also generated by the government’s failure to name a “digital markets champion” six months after promising to do so. Those in the industry note that tokenisation has been used within banks but not so much between banks, which will be the next stage of development.

And some, such as Hilary Allen, a professor at the American University Washington College of Law, warn of a “dark side” to tokenisation, which could feed instability in financial markets in times of turmoil. While the the idea of a tokenised remortgage might seem a long way from reality, Peter Left, the head of digital and markets innovation at Lloyds Banking Group, said: “It’s an aspiration … this could become more prevalent within a time frame of 12 months.”

Source: The Sunday Times