Tokenisation: Driving financial innovation and conservation
Digital tokens are set to transform assets and asset ownership, creating new investment opportunities, such as ‘net zero gold’. And conservation projects in some of the world’s most at-risk regions, including the Amazon rainforest, could benefit, explains HSBC’s Rajeev Tummala, Director of Digital and Data, Securities Services.
Tokenisation involves attaching unique code to an asset
This verifies its authenticity. The asset token – or digital representation – can then be exchanged on a blockchain, an online database powered by distributed ledger technology that keeps track of financial transactions without the need for a paper trail, and validates the ownership.
These transactions can take place in a world without banks
Tokenisation is already widely used in decentralised finance (DeFi), an alternative blockchain-based financial infrastructure with no intermediaries, such as banks. In the DeFi world, ‘smart contracts’ – computer programs that run on blockchain – automatically execute transactions once certain conditions are met.
But don’t write off banks
With the growth of DeFi, traditional financial institutions can help bridge the gap between the traditional economy, underpinned by government-backed currencies, and the decentralised economy. Several of these institutions, including HSBC , governments and regulators have been testing tokenised financial products, on various blockchain platforms.
For tokenised assets and markets to reach their growth potential, common blockchain and smart contract standards need to be established. More clarity, communication and consistency from regulatory bodies around the world is essential to spur this innovation on.
Asset markets could be revolutionised
Originally traditional asset markets, like bond trading, operated through the exchange of paper certificates. Now electronic entries are made on databases, but tokenisation would offer further improvements in efficiency, cut costs and spur innovation. The World Economic Forum estimates that equity, debt, derivatives and securitised products markets worth USD867 trillion could benefit.
Tokenisation opens up expensive and niche assets to more people
It achieves this by easily dividing ownership of assets into smaller parts, making them more affordable and accessible. For example, tokenised gold, real estate and carbon credits have recorded significant growth in recent years.
That’s where the Amazon rainforest comes in
In 2021, Moss, the largest environmental platform globally to tokenise carbon credits, raised USD10 million in eight months for Amazon rainforest conservation projects. The sale of these credits – each used to offset one ton of carbon emissions – is just one example of how tokenisation could support the global battle against climate change.
‘Net zero’ gold is a thing
One way to offset the environmental impact connected with sourcing commodities like gold is to buy carbon credits in parallel when investing in them. The process and costs involved in structuring these types of ‘layered’ investments are vastly reduced using tokenised assets. For example, net-zero tokenised gold products can be structured so that for each ounce of gold purchased, sufficient carbon credit tokens will be bought automatically to offset its carbon footprint.
Financial products can also be more flexible
Because of the manual process and operational costs, interest payments – or coupons – for traditional corporate bonds are normally paid every six months. With tokenisation, ‘smart contracts’ can be programmed to automatically pay coupons daily or weekly, depending on investors’ preferences.
Read more on HSBC’s GBM Insights page (opens in new window) (opens in new window)