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  • L Higgins and S Pettigrove

Tokenisation is blockchain's "killer use case": Citi

One of the world leading financial institutions, Citi, has released a report arguing that blockchain technology is at an "inflection point" and that the tokenisation of financial and real-world assets could be blockchain's "killer use-case".

Citi's report on "Money, Tokens, and Games" predicts that tokenisation in private markets will grow significantly, with an estimated value of up to USD$4 trillion by 2030, representing a growth factor of over 80x. Citi also estimates that up to USD$5 billion in CBDCs and stablecoins could be circulating in major economies by 2030 and that USD$1 trillion of the repossession, securities financing, and collateral market will be tokenised this decade.

Tokenisation refers to the process of converting financial or real-world assets, such as securities, artwork, or real estate, into digital tokens that can be stored and exchanged on a blockchain-based platform. It has long been put forward as one of the key use-cases of blockchain technology. According to Citi, the benefits of tokenisation, particularly for private funds and securities, are expected to drive demand-side adoption, replacing expensive reconciliations and settlement failures with increased operational efficiency, fractionalisation, and expanded accessibility to a wider range of market participants.

In its report, Citi delves deeply into the tokenisation of specific types of financial assets (such as digital securities), exploring the essential components required beyond the blockchain technology itself for the scaling of securities tokenisation. This includes a fully digitised workflow, support from traditional finance layers (like banks), technology neutral-laws, standardised taxonomy, and built for purpose legislation and regulation.

The tokenisation of financial and real world assets raises a number of legal considerations including:

  1. Securities law compliance: depending on the nature of the asset and the jurisdiction in which it is being tokenised, the tokens may be considered securities under applicable laws. As such, the issuance and trading of the tokens must comply with relevant securities laws and regulations, including registration requirements, disclosure obligations, and anti-fraud provisions for example.

  2. Property law: tokenisation of real-world assets raises questions about property ownership and transfer. The legal rights and obligations associated with owning and transferring the underlying asset must be carefully considered and addressed in the tokenisation process.

  3. Taxation: the tokenisation of financial and real-world assets may have implications for investors and issuers, including capital gains tax, sales tax, and indirect tax.

The tokenisation of financial assets is quietly gathering steam, with major US institutions such as State Street and KKR exploring tokenised funds and private assets. Blackrock, one of the world's leading asset managers, is also preparing for a tokenised future. In his 2023 Chairman's letter, Blackrock's Chairman, Larry Fink, expressed optimism over the "exciting applications" of blockchain technology, noting "the tokenization of asset classes offers the prospect of driving efficiencies in capital markets, shortening values chains, and improving cost and access for investors". Fink has previously described tokenisation of stocks and bonds as the "next generation of markets".

Citi's latest report captures the potential promise of tokenisation of financial and real-world assets. The widespread tokenisation of assets would have significant implications for financial markets. While significant institutional and legal issues remain to be traversed, many of the world's leading financial institutions are preparing for a tokenised future.

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