Replicating legacy is squandering the promise of tokenisation
In an abridged version of their digital assets white paper, Steve Whyman and Dr Ian Hunt explore how blockchain technology and tokenisation have the potential to create a new financial ecosystem, delivering compelling advantages to investors and renewed competitiveness to the UK as a jurisdiction
Image: phive2015/stock.adobe.com
Blockchain technology presents a straightforward but consequential choice: deploy tokenisation to deliver what we deliver now, but somewhat more efficiently, or exploit it, radically to extend what we can deliver and simplify how we deliver it.
One is a refurb; the other is a new and better ecosystem. Either is possible.
Our current financial ecosystem is organised along asset-specific and product-specific lines. Regulations, operations, technology, applicable laws, and business entities are all commonly peculiar to asset classes and product types. The ecosystem is complex as a result, and its complexity compounds with every innovation: each new asset class or product type adds new processes, technology, analytics, regulations, and entities. The cycle is frustratingly slow and costly, and acts as a significant disincentive to innovation.
The 1987 Big Bang was a case in point — a computerisation of paper records and manual processes, achieving greater speed and capacity, but retaining the same operational structure.
Blockchain and tokenisation are currently being promoted as exactly that: a technical upgrade, use-case by use-case. We should not assume this is the best or the only strategy. We have a choice, and we should make an informed one.
The systemic issues that tokenisation can resolve
Tokenisation — the buzz
Franklin Templeton and BlackRock have positioned full tokenisation of real-world assets as a destination for financial innovation.
The UK Financial Conduct Authority (FCA) and Bank of England are developing policy to accelerate its adoption. LSEG, NYSE, and DTCC have all committed to issuing, trading, and settling tokenised versions of all assets in their respective universes.
Tokenisation targets ownership first: tokens are alternatives to familiar ownership markers — shares, register entries, title deeds — but can transcend that role if deployed correctly. Unlike digital registries, tokens unitise programmatically, represent aspects of ownership digitally, and can codify and automate the processes and rules that implement ownership rights. They are also encoded cryptographically on blockchains, making them highly secure and their history immutable.
Diversification is king? Or a driver of complexity and cost?
The defining characteristic of our current financial ecosystem is diversity: diverse products, clients, jurisdictions, asset classes, products and applicable laws. Ownership markers, regulations, transaction processes, valuation methods, and the entities performing roles within the ecosystem are all commonly idiosyncratic to individual asset classes and product types.
Regulatory complexity is a direct function of this variety, and grows inexorably as new assets and products are added.
The result is a persistently high cost-base that tends to rise rather than fall, while fees are heading downwards.
Margin pressure is driving asset managers into consolidation and cost-cutting as survival tactics, but they have largely exhausted conventional cost-reduction measures, like outsourcing operations or offshoring resources. The delivery of individualised solutions is still economically viable only for the largest clients; one-size-fits-all products predominate otherwise.
Disappointing active returns have driven a flight to passive and to private assets — the latter bringing its own operational penalties in manual processing, bespoke arrangements, and poor data quality.
Investing has become a scale game: the winners are the best asset gatherers, not always the best investors.
A resolution to these issues: Composable tokens
What can we do about diversity, cost and complexity?
The direction to travel is clear: eliminate or remediate the drivers of complexity.
The closer we get to a single operating model, common technology and aligned regulation and law across assets and products, the better.
Tokenisation, deployed effectively, provides the essential tools for that optimisation — but only if we have commercial ambition, regulatory willingness, and political commitment to pursue it.
Fortunately, there is strong commonality at the root of all financial products. Every product has two basic components: current value (what you own today) and future value (what you expect to give or receive).
Financial products convert one into the other. This commonality makes composability both feasible and practical, and is the key to reduction of complexity.
An optimal approach to tokenised ownership
In a composable digital ecosystem, we need just two token types:
Tokens of title: representing the legal relationship between owner and asset. Static and current, they do not self-execute, but evidence rights of use, enjoyment and control.
Tokens of entitlement: representing the right to receive, and the commitment to deliver, economic benefit. As they imply a future transfer of value, they can be self-executing.
Entitlement tokens are surprisingly simple, with just five core data fields: an Issuer ID; a Trigger (date, event, or both); a Token ID (what transfers when triggered); a Terms Formula (computing the quantity transferred); and a Set of Constraints (restrictions on eligible recipients).
The truth about financial assets
All financial assets — equities, bonds, loans, swaps, options — are, in their real nature, clusters of entitlements to value flows. A bond is a convenient label for a stream of cashflows, each with its own timing and risk; a swap is a set of back-to-back entitlements; an option is a contingent entitlement to a single flow.
Their categorisation as 'assets' analogous to property has been convenient in law and regulation, but adds no analytical content. In a composable ecosystem they can all be represented fully by clusters of title and entitlement tokens — without any need for special-purpose or asset class-specific token design.
Composable tokens — the outcome
A composable framework is a systematic solution to the systemic issues of investment. Through a single self-executing operating model and common technology, delivery costs fall across all asset classes simultaneously.
Regulations and law can be harmonised across asset and product types, unwinding the upward spiral of regulatory complexity.
Innovation becomes rapid and low-cost: new product types and asset classes can be built without modifying the common infrastructure, with applicable laws and regulations inherited from underlying components.
Self-execution, combined with the ease of constructing new products, makes individualised solutions practical and profitable at much lower levels of value — enabling the industry to deliver at scale what it currently reserves for its largest clients.
These are strategic solutions to systemic issues, not survival tactics.
Building and implementing a composable infrastructure
A composable ecosystem benefits from a common operating model: if the technology supports loans, it supports options; if it supports equities, it supports collateral management. The infrastructure build is simpler than evolving the current patchwork of asset-specific platforms, though of course it is far from trivial.
Effective governance — aligned supervision, standards and rules across participants and jurisdictions — is a prerequisite. This will be addressed in a further paper.
From a technical perspective, a working composable infrastructure could be operational in under two years, enabling issuance, composition, and trading of tokens and clusters.
The inflection point, where composability becomes the dominant model, could arrive very quickly thereafter.
Digital veneer: Replicating legacy in token form
How incumbents respond to the opportunity
Incumbents face three choices: embrace ecosystem change, transform the products we deliver, and open new client segments (Camp 1); deploy tokenisation within existing business and delivery models (Camp 2); or resist it as a threat to current roles and revenues (Camp 3).
Most market participants are currently in Camp 2, which is also the favoured position of blockchain businesses seeking quick ROI and rapid revenue. Camp 2 can be genuinely valuable: it builds practical experience, establishes legal and regulatory precedent, and demonstrates real business benefits.
So long as greater ambition is not shut off, It can provide the foundation for a composable ecosystem. It is not, however, a destination. Kodak and Blockbuster were Camp 2 occupants.
The lesson is clear.
Why the dominant approach falls short of the opportunity
Tokenising the ownership of conventional assets and products changes the way we own things, while making little difference to the things that are owned.
Raw tokenisation of ownership has often been insufficient to justify the cost of change and the parallel operation of two infrastructures.
The relatively slow adoption of fund tokenisation following the 2023 UK Treasury Asset Management Task Force baseline illustrates the point well.
Encoding the rights, terms and conditions, processes and regulations of existing assets onto tokens is counter-productive in the context of composability.
It concretises what we currently deliver, and constrains tokens to the assets and products for which they were designed. Innovation will still require new regulations, technology, processes and laws — wrapped into yet more special-purpose tokens. The drivers of growing complexity, and the disincentives to innovation, remain entirely unchanged.
The end result is the same old ecosystem, running on two parallel technologies: the same horse, with a steroid injection.
Conclusion
Through composability, clusters of title and entitlement tokens are adequate to represent any financial asset or product useful in investment. There is no requirement for the rights, behaviours and rules of individual asset classes to be encoded onto bespoke tokens: doing so only replicates the current ecosystem, concretises boundaries between asset classes, and disables composability.
The benefits are compelling, and the imperative is socioeconomic as much as commercial. A composable ecosystem can deliver individualised investment solutions at scale and low cost, addressing the systemic issues that constrain provision for an ageing population, and renewing the UK's competitiveness as a global centre for financial issuance and trading.
The current wave of tokenisation work is laying foundations. Those foundations must be treated as a beginning: designed from the outset to evolve into a composable ecosystem, not to concretise the structures of the current world in new technology.
We know what to do. The only question is whether we have the courage to see the journey through to its real destination.
Lord Holmes of Richmond comments: "This is a thoughtful and timely paper, urging us to seize the transformational opportunity that digitisation presents. It entreats us to take this path, before we miss our chance, and just serve up ‘more of the same’, delivered with some slicker technology.
"In short, the paper positively presents the application of the principles of composability, applied to investment.
"All of us are borrowers and investors, through savings, pensions, and funding for government and industry.
"We rely on the financial system to deliver our essential capability to invest, to borrow and to manage risk.
"The efficiency with which it does that has a direct impact on our wealth, on our security and, not least, on our ability to support an ageing population".
One is a refurb; the other is a new and better ecosystem. Either is possible.
Our current financial ecosystem is organised along asset-specific and product-specific lines. Regulations, operations, technology, applicable laws, and business entities are all commonly peculiar to asset classes and product types. The ecosystem is complex as a result, and its complexity compounds with every innovation: each new asset class or product type adds new processes, technology, analytics, regulations, and entities. The cycle is frustratingly slow and costly, and acts as a significant disincentive to innovation.
The 1987 Big Bang was a case in point — a computerisation of paper records and manual processes, achieving greater speed and capacity, but retaining the same operational structure.
Blockchain and tokenisation are currently being promoted as exactly that: a technical upgrade, use-case by use-case. We should not assume this is the best or the only strategy. We have a choice, and we should make an informed one.
The systemic issues that tokenisation can resolve
Tokenisation — the buzz
Franklin Templeton and BlackRock have positioned full tokenisation of real-world assets as a destination for financial innovation.
The UK Financial Conduct Authority (FCA) and Bank of England are developing policy to accelerate its adoption. LSEG, NYSE, and DTCC have all committed to issuing, trading, and settling tokenised versions of all assets in their respective universes.
Tokenisation targets ownership first: tokens are alternatives to familiar ownership markers — shares, register entries, title deeds — but can transcend that role if deployed correctly. Unlike digital registries, tokens unitise programmatically, represent aspects of ownership digitally, and can codify and automate the processes and rules that implement ownership rights. They are also encoded cryptographically on blockchains, making them highly secure and their history immutable.
Diversification is king? Or a driver of complexity and cost?
The defining characteristic of our current financial ecosystem is diversity: diverse products, clients, jurisdictions, asset classes, products and applicable laws. Ownership markers, regulations, transaction processes, valuation methods, and the entities performing roles within the ecosystem are all commonly idiosyncratic to individual asset classes and product types.
Regulatory complexity is a direct function of this variety, and grows inexorably as new assets and products are added.
The result is a persistently high cost-base that tends to rise rather than fall, while fees are heading downwards.
Margin pressure is driving asset managers into consolidation and cost-cutting as survival tactics, but they have largely exhausted conventional cost-reduction measures, like outsourcing operations or offshoring resources. The delivery of individualised solutions is still economically viable only for the largest clients; one-size-fits-all products predominate otherwise.
Disappointing active returns have driven a flight to passive and to private assets — the latter bringing its own operational penalties in manual processing, bespoke arrangements, and poor data quality.
Investing has become a scale game: the winners are the best asset gatherers, not always the best investors.
A resolution to these issues: Composable tokens
What can we do about diversity, cost and complexity?
The direction to travel is clear: eliminate or remediate the drivers of complexity.
The closer we get to a single operating model, common technology and aligned regulation and law across assets and products, the better.
Tokenisation, deployed effectively, provides the essential tools for that optimisation — but only if we have commercial ambition, regulatory willingness, and political commitment to pursue it.
Fortunately, there is strong commonality at the root of all financial products. Every product has two basic components: current value (what you own today) and future value (what you expect to give or receive).
Financial products convert one into the other. This commonality makes composability both feasible and practical, and is the key to reduction of complexity.
An optimal approach to tokenised ownership
In a composable digital ecosystem, we need just two token types:
Tokens of title: representing the legal relationship between owner and asset. Static and current, they do not self-execute, but evidence rights of use, enjoyment and control.
Tokens of entitlement: representing the right to receive, and the commitment to deliver, economic benefit. As they imply a future transfer of value, they can be self-executing.
Entitlement tokens are surprisingly simple, with just five core data fields: an Issuer ID; a Trigger (date, event, or both); a Token ID (what transfers when triggered); a Terms Formula (computing the quantity transferred); and a Set of Constraints (restrictions on eligible recipients).
The truth about financial assets
All financial assets — equities, bonds, loans, swaps, options — are, in their real nature, clusters of entitlements to value flows. A bond is a convenient label for a stream of cashflows, each with its own timing and risk; a swap is a set of back-to-back entitlements; an option is a contingent entitlement to a single flow.
Their categorisation as 'assets' analogous to property has been convenient in law and regulation, but adds no analytical content. In a composable ecosystem they can all be represented fully by clusters of title and entitlement tokens — without any need for special-purpose or asset class-specific token design.
Composable tokens — the outcome
A composable framework is a systematic solution to the systemic issues of investment. Through a single self-executing operating model and common technology, delivery costs fall across all asset classes simultaneously.
Regulations and law can be harmonised across asset and product types, unwinding the upward spiral of regulatory complexity.
Innovation becomes rapid and low-cost: new product types and asset classes can be built without modifying the common infrastructure, with applicable laws and regulations inherited from underlying components.
Self-execution, combined with the ease of constructing new products, makes individualised solutions practical and profitable at much lower levels of value — enabling the industry to deliver at scale what it currently reserves for its largest clients.
These are strategic solutions to systemic issues, not survival tactics.
Building and implementing a composable infrastructure
A composable ecosystem benefits from a common operating model: if the technology supports loans, it supports options; if it supports equities, it supports collateral management. The infrastructure build is simpler than evolving the current patchwork of asset-specific platforms, though of course it is far from trivial.
Effective governance — aligned supervision, standards and rules across participants and jurisdictions — is a prerequisite. This will be addressed in a further paper.
From a technical perspective, a working composable infrastructure could be operational in under two years, enabling issuance, composition, and trading of tokens and clusters.
The inflection point, where composability becomes the dominant model, could arrive very quickly thereafter.
Digital veneer: Replicating legacy in token form
How incumbents respond to the opportunity
Incumbents face three choices: embrace ecosystem change, transform the products we deliver, and open new client segments (Camp 1); deploy tokenisation within existing business and delivery models (Camp 2); or resist it as a threat to current roles and revenues (Camp 3).
Most market participants are currently in Camp 2, which is also the favoured position of blockchain businesses seeking quick ROI and rapid revenue. Camp 2 can be genuinely valuable: it builds practical experience, establishes legal and regulatory precedent, and demonstrates real business benefits.
So long as greater ambition is not shut off, It can provide the foundation for a composable ecosystem. It is not, however, a destination. Kodak and Blockbuster were Camp 2 occupants.
The lesson is clear.
Why the dominant approach falls short of the opportunity
Tokenising the ownership of conventional assets and products changes the way we own things, while making little difference to the things that are owned.
Raw tokenisation of ownership has often been insufficient to justify the cost of change and the parallel operation of two infrastructures.
The relatively slow adoption of fund tokenisation following the 2023 UK Treasury Asset Management Task Force baseline illustrates the point well.
Encoding the rights, terms and conditions, processes and regulations of existing assets onto tokens is counter-productive in the context of composability.
It concretises what we currently deliver, and constrains tokens to the assets and products for which they were designed. Innovation will still require new regulations, technology, processes and laws — wrapped into yet more special-purpose tokens. The drivers of growing complexity, and the disincentives to innovation, remain entirely unchanged.
The end result is the same old ecosystem, running on two parallel technologies: the same horse, with a steroid injection.
Conclusion
Through composability, clusters of title and entitlement tokens are adequate to represent any financial asset or product useful in investment. There is no requirement for the rights, behaviours and rules of individual asset classes to be encoded onto bespoke tokens: doing so only replicates the current ecosystem, concretises boundaries between asset classes, and disables composability.
The benefits are compelling, and the imperative is socioeconomic as much as commercial. A composable ecosystem can deliver individualised investment solutions at scale and low cost, addressing the systemic issues that constrain provision for an ageing population, and renewing the UK's competitiveness as a global centre for financial issuance and trading.
The current wave of tokenisation work is laying foundations. Those foundations must be treated as a beginning: designed from the outset to evolve into a composable ecosystem, not to concretise the structures of the current world in new technology.
We know what to do. The only question is whether we have the courage to see the journey through to its real destination.
Lord Holmes of Richmond comments: "This is a thoughtful and timely paper, urging us to seize the transformational opportunity that digitisation presents. It entreats us to take this path, before we miss our chance, and just serve up ‘more of the same’, delivered with some slicker technology.
"In short, the paper positively presents the application of the principles of composability, applied to investment.
"All of us are borrowers and investors, through savings, pensions, and funding for government and industry.
"We rely on the financial system to deliver our essential capability to invest, to borrow and to manage risk.
"The efficiency with which it does that has a direct impact on our wealth, on our security and, not least, on our ability to support an ageing population".
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