The report ‘Unlocking the power of securities tokenisation’, produced in conjunction with Oliver Wyman, looks at how securities tokenisation (the digital representation of real financial assets) will transform capital markets and international banking infrastructure.

The tokenisation of securities could improve the financial system’s operational efficiencies. However, these benefits have yet to be realised at scale as the markets, globally and in the UK, are in their infancy. Currently, tokenised issuances are still a fraction of traditional securities issuance.

Key findings

Based on work undertaken with the largest banks, financial market participants, investors government, regulators and other trade bodies, alongside detailed research on global innovations to date, the report finds:

The UK has built positive momentum around tokenisation from a legal and regulatory perspective, including some flagship legislative initiatives.

This includes via the Financial Services and Markets Act which allows for HM Treasury to introduce financial market infrastructure (FMI) regulatory sandboxes for distributed ledger technology (DLT) projects. Strong work has also been undertaken by our Law Commission and UK Jurisdiction Taskforce.

There has been minimal tokenised securities issuance activity in the UK, especially compared to other jurisdictions.

Certain projects are underway in the UK and some key digital issuances elsewhere have had a UK nexus and have benefitted from UK expertise. More home-grown initiatives are needed in the UK so that skills and infrastructure can continue to evolve.

The UK is behind some other jurisdictions with regards to tokenised securities issuances, but it is not irrevocably so.

In the last year there have been a range of tokenisation initiatives launched across the globe, however these were either largely experimental or focused on tokenising specific parts of the lifecycle rather than end to end.

Lessons can be learned as to how other jurisdictions are approaching tokenisation.

For example, leading jurisdictions have focused first on putting in place the legal and regulatory frameworks that give industry participants the confidence to interact with tokenised securities.

Three key missions

The report lays out three key areas that the UK needs to focus on to become a leader in securities tokenisation:

Mission One: Enable innovation and experimentation, underpinned by legal and regulatory certainty

Legal and regulatory certainty is essential. We commend the strong work undertaken by the Law Commission in its recent Digital Assets report and by the UK Jurisdiction Taskforce, as well as by the Law Society. Momentum should be maintained to make the necessary regulatory and statutory refinements to drive certainty and confidence in the UK. In addition, industry participants need space to innovate around securities tokenisation and a place to experiment is required to do this. A highlight of key recommendations include:

HM Treasury should urgently further define the roadmap for the FMI Sandbox, including a view of how it will prevent cliff-edge effects when the Sandbox ends.

The Financial Conduct Authority, the PRA and the Bank of England should provide further flexibility on Central Securities Depositories Regulation (CSDR) and any provisions to allow industry participants to navigate the requirements to use a CSD.

HM Treasury and the Bank of England should continue to support the development of digital cash solutions to enable the settlement of transactions.

HM Treasury via the Debt Management Office should issue a digital gilt within the FMI Sandbox.

Mission Two: Foster a flourishing UK digital market by promoting interoperability and safe innovation at-scale

For the UK to achieve this mission, there needs to be market liquidity and a scaled-up, connected market for tokenised securities. Recommendations to achieve this include:

HM Treasury, the FCA, and the Bank of England should encourage industry participants to convene and develop voluntary standards around tokenised securities.

HM Treasury should explore if there is industry appetite for a shared, national infrastructure for tokenised securities

Mission Three: Become a leader in global standards for the tokenised securities market

The UK needs to play an active role in facilitating the establishment of supranational standards that will enable interoperability of distributed technology networks as they evolve. These standards are still in the early stages. There is an opportunity for the UK to establish itself as a leader by convening different jurisdictions to agree the path forward, and sponsoring initiatives to drive convergence. As part of this, the UK should collaborate with other jurisdictions such as Singapore or the EU and connect to their pilots or sandboxes to align international initiatives and form the basis of cross-border tokenisation ecosystem.

The full list of recommendations can be found in Chapter 3 of the report.

Bob Wigley, Chair of UK Finance, said:

Securities tokenisation is likely to transform financial markets, through delivering lower costs, lower risks, and wider market access. But without continued bold action the UK risks falling behind other jurisdictions.

In today’s new report, we worked with a wide range of market participants, the government, and regulators to outline the benefits of securities tokenisation and highlight the challenges the UK needs to overcome.

The opportunities that tokenisation presents are substantial and given the UK is a leading global financial centre, we need to be at the forefront of developments.

Lisa Quest, Head of UK & Ireland, and Co-Head of the Public Sector and Policy Practice, Europe, Oliver Wyman, said:

Tokenisation has the potential to shift the way assets are managed and leveraged in a transformative way.

This report marks an exciting milestone for government and industry to unlock that opportunity.

It highlights some key actions that can promote innovation and the eventual interoperability of solutions, while also ensuring that the UK’s markets remain highly competitive and underpinned by the technology that will power markets of the future.