Tokenization refers to the digital representation of financial assets using distributed ledger technology (DLT). Countries across the globe are evaluating the scope and dynamics of Tokens whereas countries such as India have initiated the pilot project in a few metropolitan cities to access and survey the benefits related and repair the loopholes if present.
The UK has also built positive momentum around tokenization, including some flagship legislative initiatives in recent months. Most industry participants, however, still feel it is behind relative to other jurisdictions. Tokenized securities issuance is one metric that can be used to measure a jurisdiction’s progress, but other factors that are prerequisites to scaling up a tokenized securities market, such as legal and regulatory reforms, the necessary market infrastructure, and government support for innovation, are also extremely important.
There has been minimal tokenized securities issuance activity in the UK, especially compared to other jurisdictions. Many of the issuances globally have been in digital bonds. The number and diversity of issuers, as well as the value of Digital bond issuance, has grown in recent years. These issuances are estimated at less than 1% of the $20.6 trillion that was issued in long-term fixed-income instruments in 2021.
Recently a report published by UK Finance titled “Unlocking The Power Of Securities Tokenization” highlighted how the UK can lead digital transformation and consolidate its role as a global financial centre. It underlined the role of governance and legislation. Further, it also demarcated the current state to token in the UK, the key enablers for tokens and discussed legal provisions in other jurisdictions.
In the published report it was highlighted that Legislation in civil law jurisdictions such as France, Switzerland, and Luxembourg, for example, have provided clarity around the treatment of digital assets, and initial issuances have followed. The UK is exploring legal reforms to support digital assets, including tokenized securities. English common law already puts the UK on a strong legal footing, as
outlined in the summaries of existing law within the UK Jurisdiction Task Force’s Legal Statements
on crypto assets and smart contracts, digital dispute resolution rules, and digital securities.
The Law Commission has also shown thought leadership in its recent final report on digital assets. The report confirms that English and Welsh law is supportive of digital assets within the UK. The Law Commission further recommends two areas of statutory reform. Firstly, that legislation should confirm the existing common law position that digital assets are capable of attracting personal property rights.
Secondly, that statute should clarify the digital securities models falling within the scope of the existing Financial Collateral Arrangements Regulations (FCARs), and provide a framework for crypto-token collateral arrangements outside of FCARs’ scope. The Financial Conduct Authority (FCA) has also already clarified that tokenized securities fall within the regulatory perimeter.
There is, however, recognition that the current UK regulatory regime could adapt to allow for greater flexibility in implementing tokenization initiatives. There are welcome efforts already underway
in the UK. The Financial Services and Markets (FS&M) Act, outlined upcoming reforms, including those allowing His Majesty’s Treasury to introduce financial market infrastructure regulatory Sandboxes for DLT projects.
As per the report, the tokenisation market could evolve along three structures, the first market structure is one of experimentation where the industry and regulators grow comfortable with the technology in a wholesale environment. A second market structure is where previously siloed ledgers
become interoperable and wholesale institutions begin to use these technologies to tokenize previously illiquid assets. A third market structure is when ledgers become universal, and all financial instruments are tokenized.
Therefore, To support the UK market’s development, there are three “missions” that the UK government and industry should urgently pursue. Each mission introduces activities that the UK can undertake
immediately. Efforts to achieve these missions will kick off positive “feedback loops” that will make it easier for the UK to achieve and maintain its role as a global leader in securities tokenization.
These missions are, Mission One: Enable innovation and experimentation, underpinned by legal and regulatory certainty. Mission Two: Foster a flourishing UK digital market by promoting
interoperability and safe innovation at scale. Mission Three: Become a leader in global standards for the tokenized securities market.
There is an opportunity for the UK to distinguish itself from peers by moving beyond issuance faster, building a critical mass of liquidity in secondary markets, and then unlocking significant value in use cases across the securities lifecycle. This is also a matter of competitiveness. A strong and dynamic market is a strategic and economic priority for the UK.
Accordingly, there is a need to simplify and streamline operational processes through,
for example, introducing technology like tokenization that improves efficiency. This will require considered, thoughtful collaboration across all stakeholders, a committed and pragmatic approach to investment in market infrastructure; and setting and achieving milestones for progress, holding everyone to account.