Tokenisation could add billions to UK economy: UK Finance

If the UK acts now, it can leverage its fintech momentum to add billions to its economy by tokenising financial instruments, a new report suggests.

UK Finance, the influential lobby group for banking and financial institutions, has laid down a five-year-plan for the country’s government to become a world leader in tokenised markets.

The trade association relays policy demands from over 300 organisations including some of the world’s biggest banks like Barclays, Santander, Citi and HSBC as well as fintech leaders like Revolut and Monzo.

‘Securities tokenisation is likely to transform financial markets, through delivering lower costs, lower risks, and wider market access’

—  Bob Wigley

Transforming financial markets

“Securities tokenisation is likely to transform financial markets, through delivering lower costs, lower risks, and wider market access,” Bob Wigley, chair of UK Finance, said.

“But without continued bold action the UK risks falling behind other jurisdictions.”

Tokenisation, or the translation of financial assets onto blockchains, could have a few key benefits, the report argued.

The process could lower transaction costs, allow for instant payment settlements, and reduce counterparty risk through programmable smart contracts, as well as through recording immutable data on blockchain.

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The report is a result of consultations with market participants, the government, and regulators, according to Wigley, and was penned together with Oliver Wyman consulting firm.

Value of tokenising

It is hard to pin down how much tokenisation is worth and estimates remain inconsistent, but “there is growing consensus that it could be transformational,” the UK Finance report said.

A Citi Global Perspectives and Solutions study cited in the report expects up to $5 trillion of outstanding tokenised securities by the end of the decade.

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A 2020 European Union simulation also cited estimates up to €55 billion annual inflow from laying down a regulatory pathway for crypto, including tokenised securities.

Globally, financial trendsetters dabble with tokenising financial instruments.

The tech underlying decentralised finance could feed into a trillion-dollar foreign exchange market, the Bank of International Settlements recently reported, as it studies the benefits to blockchain.

UK crypto policy

The UK is making headway on its crypto regulation.

The Financial Services and Markets Bill passed into law last week, including new rules on stablecoins and crypto advertising.

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The Financial Conduct Authority issued a letter to crypto firms on Tuesday that it will enforce financial promotion laws by 8 October, in line with the FSMB.

UK officials also put out a consultation on a more comprehensive crypto regulation framework in February, inviting industry and experts to weigh in on what the next policy should look like.

Lisa Cameron, the MP leading the UK Parliament’s group on crypto assets, hopes to see those new laws in place before elections next autumn.

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Despite all the activity on the crypto regulation front, more could be done “to allow for greater flexibility in implementing tokenisation initiatives,” the UK Finance report said.

Urgent action

The UK Treasury should kick off its financial market infrastructure sandbox project to allow market participants to experiment with tokenised financial instruments and make the steps after the experimentation clear, the report urged.

Government, regulators and the central bank must also work on relevant definitions relating to tokenisation to “ensure that usage is not conflated or misinterpreted by industry.”

“Failure to act will result in the UK losing an opportunity to consolidate its position as a top global financial centre,” the report said.

Law Commission recommendations

The UK Finance report agreed with the Law Commission’s recent recommendations for legal reforms, including that the UK develops a new statutory category of property to include digital assets.

Analysts behind the UK Finance report agree with those reforms, and have added their realisation to authorities’ to-do lists.

Have a tip or comment on the UK crypto laws? Contact the author at inbar@dlnews.com.