DEFINING INDUSTRY STANDARDS:

SCALING TOKENISATION AND BUILDING INTEROPERABILITY

IN THE PRIMARY AND SECONDARY MARKETS

REPORT AUTHOR

Sash Mukherjee
VP Industry Insights, Ecosystm

September 2023

ECOSYSTM
www.ecosystm360.com | info@ecosystm360.com
EXECUTIVE SUMMARY
Tokenisation enables the creation of digital representations for financial or real-world assets on blockchains or

distributed ledgers, offering transparency, liquidity, and accessibility. While not a new phenomenon, it has gained

renewed interest in the last couple of years, with significant traction in institutional financial services. This is primarily

due to the potential to improve primary and secondary markets by unlocking trapped liquidity, enhancing compliance

and reducing costs through efficiency gains brought by standardisation, automation, and disintermediation.

Despite the real advantages that tokenisation could offer, the volume of tokenised assets remains low, relative to the

potential. One noteworthy instance is represented by tokenised cash, which takes the shape of completely backed

"stable coins" and tokenised bank deposits. The value of U.S. treasury assets on public blockchains has surpassed USD

650 million recently and continues to grow at a healthy clip. In the near-term, tokenisation of financial and real-world

assets is projected to reach up to USD 5 trillion by 2030, with notable growth in private markets and the repo,

securities financing, and collateral markets. Ultimately, the long term potential value of assets to be tokenised is

massive: from the USD 250 trillion global capital markets to the USD 300 trillion-plus global real estate market.

PUSHING TOKENISATION OVER THE TIPPING POINT

For a more widespread adoption, challenges such as access to expertise, inconsistent regulatory treatment, and a lack

of mature, interoperable networked infrastructure need to be addressed. Many banks today recognise the immense

potential of tokenisation but also acknowledge the difficulty of going beyond proofs of concept to demonstrating real

value and compelling business cases. To scale tokenisation effectively, infrastructure must be scalable, standardised,

and networked, enabling seamless communication and data sharing.

Encouraging progressive regulatory developments being introduced in the European Union, the UK, Switzerland,

Singapore, and Hong Kong among others hold promise of reducing ambiguity and lowering barriers of adoption.

At the Point Zero Forum 2023, Ecosystm Chief Growth Officer Anubhav Nayyar moderated a Leaders Roundtable in

partnership with Metaco, that saw representation from a broad range of Financial Services stakeholders such as large

custodian banks, central banks, neo banks, consultants, buy-side investors, and providers of crypto solutions. The

discussion centred on the challenges that the industry faces in scaling tokenisation and building interoperability

across primary and secondary markets. This report presents a synthesis of the discussion.

The one overarching conclusion of the discussion was that while technology and regulatory infrastructure has

a key role to play, industry collaboration and incentive alignment to define global standards are critical.

Representatives from Metaco, Ecosystm, two Europe-based central banks, three top 10 global custodian banks, a Europe-based securities settlement company, a Europe-

based investment bank, a Europe-based digital asset bank, a Singapore-based digital financial services bank, a big 4 consultancy firm, a leading provider of enterprise

blockchain and crypto solutions, a corporate venture capital arm of a top 5 asset management firm, and a Singapore-based fintech company.

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KEY TAKEAWAYS

#1 DeFi Adoption: Are the True Benefits Being Realised?

It is interesting to note that Bitcoin was originally conceived as

“The risk is to replicate existing
an alternative to the traditional banking system. However, when processes, which have been in
play for 30-40 years, and adapt
we apply blockchain principles to the highly regulated and
or put them on top of a
centralised system, it raises doubts about the true efficiency blockchain. This often leads to
no real value improvement and
gains. Replicating existing (TradFi) processes may not be the
comprehensive user experience.
most effective approach, and the value improvement can be Additionally, there is currently
no liquidity on the chain, which
questioned. The overt financialisation with the advent of
puts off clients because there's
cryptocurrencies has obscured other potential use cases of DLT no drive to leverage the
technology for what it is and
and tokenisation. There may be a case for shifting the narrative potentially transform entire
back to the ‘blockchain’ by focusing on other use cases such as processes.”

Broadridge, an American fintech firm that facilitates over USD 1 ROUNDTABLE PARTICIPANT

trillion worth of tokenised repurchase agreements on its

DLT-based repo platform.

Attempting to bring blockchain benefits to the existing infrastructure and risk measures can be challenging and

costly. There is a need for broader adoption of a ‘bridging layer’ that will enable DLT-based systems to interact

with the existing banking systems natively and securely. Service providers need to do more by scaling their

proofs of concept into real business use cases, demonstrating discernible return on investment (ROI).

There seems to be a disconnect in fully embracing the true benefits of Decentralised Finance (DeFi) in the

industry's legacy operating models. The development of these models appears to require significant resources

and investment, but without a clear business case and tangible ROI, participants are questioning the value and

proof of the approach. DeFi ecosystems will need to evolve beyond cryptocurrencies to include tokenisation and

trading of off-chain assets such as corporate bonds and other fixed income products.

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#2 Scaling Innovations from Pilot Projects to Tangible Solutions

Tokenisation has shown promise in proofs of concept but faces challenges in wider adoption by mainstream

industries. To move beyond being a mere technological novelty, it must demonstrate its ability to deliver

meaningful outcomes such as adding increased programmability and liquidity to illiquid assets. This requires

collaboration and consensus among stakeholders from different industries. However, establishing common

standards and frameworks can be complex, with the lack of consistent global regulatory framework around

digital assets. However, progressive regulatory developments, such as European Union’s Markets in Crypto-

Assets Regulation (MiCA) and Germany’s Electronic Securities Act (eWpG), hold promise of resolving this

ambiguity and are growing the appetite of industry players to start building capabilities. In trade finance and

other sectors, the recognition of digital documents under common law in the United Kingdom, is also lowering

barriers to adoption.

To gain wider adoption, it is essential to showcase early adopters who have embraced the potential of

tokenisation. Demonstrating the value proposition to the wider ecosystem can lead to scaling tokenisation use

cases.

The biggest challenge in transitioning from innovation showcase projects to scalable solutions that deliver

tangible value, is in achieving volume through interconnected workflows and creating a sustainable secondary

market with liquidity access and the right incentive mechanisms. This is where the industry needs to focus to

unlock the benefits of tokenisation, trading, and custody.

The choice of use cases also impacts adoption. While interest

“We must focus on finding use
exists on the buy-side, translating it into investments and cases that offer a clear value
proposition in the near term.
scaling up has proven challenging. Use cases like digital bonds,
This way, we can accelerate
while simple to start with, may not provide a clear enough adoption and demonstrate
tangible benefits to the
value proposition to keep it on top of the list among
industry.”
competing client priorities. Exploring use cases focused on
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assets such as corporate bonds and securities that enhance

programmability and liquidity in the short term, will be the way

forward for successful scaling and adoption.

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#3 The Many Dimensions of Interoperability

Interoperability is a critical factor for widespread industry adoption of tokenisation, particularly within specific

sectors like Banking. To address this, collaboration among buyers, issuers, regulators, and technology providers

is crucial. In the realm of traditional finance, the European Union has been focusing on enhancing interoperability

to foster innovation and a healthy market dynamic. Liquidity for tokenised assets can be facilitated by incumbent

service providers to improve scalability.

It is important to bear in mind that retail consumers around the world are increasingly eager to access digital

assets, and this is prompting the industry to expedite this access. Currently, the landscape might be fragmented,

but green shoots are emerging with scaled experiments by large global banks and progressive regulation being

introduced in certain regions.

Here are some real-world interoperability challenges:

We have wallets, custodians, and tokenisation entities, all with auditable lifecycles in place. However, if

one issuer approaches Bank A and issues 100 tokens, a customer from Bank B cannot easily access those

tokens. The lack of interoperability means that each bank operates within its own ecosystem, preventing

seamless trading across the market.

We lack a standard for what smart contracts can and cannot do across jurisdictions. This poses a

significant challenge.

I require integration of my crypto/digital asset holdings with my traditional account structures, as I use

them for all my financial activities.

Regulatory clarity enables asset trading and services within a governance framework. And the DLT-enabled

ecosystem requires defined standards and protocols to achieve interoperability efficiently. This requires

collaborative public-private partnerships to develop and implement these solutions, and technology enablers

must be part of this journey within the ecosystem, every step of the way, in partnership with consultancies and

systems integrators, to realise the full potential of a tokenised economy.

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#4 Striking a Balance Between Centralisation and Disintermediation

The adoption of blockchain technology by highly centralised

“When we think about the
institutions like banks can pose challenges to its core values of original values of blockchain
and try to apply them to the
decentralisation and disintermediation. Blockchain’s first use
highly centralised and regulated
case was designed as an alternative to the centralised banking financial system that we have
today, we inevitably lose two
system, aiming to eliminate intermediaries and enable peer-to-
key pillars of value.”
peer transactions without trusted third parties. However, within ROUNDTABLE PARTICIPANT
the regulated and centralised environment of the banking

industry, the full potential of blockchain's decentralised aspects

is often limited by existing regulatory frameworks and established

structures.

Applying blockchain in a centralised setting may compromise its core values. Standardisation might take

precedence over decentralisation, and the technology might be primarily used as a protocol for asset transfer,

rather than eliminating intermediaries. The entrenched constructs and regulatory frameworks in the industry

hinder the realisation of blockchain's disruptive potential, even though existing systems may already function

effectively for most asset classes.

To make progress in the industry, market participants must strive for consensus, whether through blockchain

or other technologies. However, the fragmentation of the industry, with each bank developing its closed and

permissioned infrastructure, hinders the convergence towards a unified and valuable blockchain ecosystem.

The true value of blockchain lies in its ability to establish consensus and shared standards. Blockchain needs to

be looked at beyond the hyperfinacialised cryptocurrency use case, as a superior system of managing assets,

data, and provenance.

Layer 2 (off-chain) networks are a promising solution to address challenges in the public infrastructure side. As

a custodian, the focus of banks is on providing a common operating model for clients, regardless of whether

they invest in assets through public or permissioned blockchains. However, achieving interoperability between

different chains and addressing regulatory and privacy concerns remain significant challenges in fully

embracing blockchain's potential for issuing regulated securities on decentralised public infrastructure.

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#5 The Key to Establishing a Secondary Market is Liquidity

Liquidity plays a crucial role in establishing a thriving secondary

“If there's no liquidity and
market for tokenised assets, and it remains a significant there's no ecosystem around
that, it’s not going to scale.”
challenge that needs addressing. While tokenised assets can be
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issued, without a supportive ecosystem and sufficient liquidity,

scaling becomes an uphill battle. Liquidity is a critical element in

facilitating seamless and timely settlement processes, contributing to overall market efficiency and confidence.

In this transformative journey, smaller banks face the challenge of interacting with the broader banking

ecosystem. There is a need to demonstrate the value and potential of blockchain technology without merely

replicating existing processes. Banks should focus on reimagining their processes rather than attempting to

retrofit DLT technology into legacy products, services, and processes.

It is important to recognise that blockchain technology is not just about standardisation or tokenising assets for

centralised trading. The true value of blockchain lies in its ability to revolutionise the entire trade flow, from

issuance to peer-to-peer trading in liquidity pools, bypassing intermediaries and creating a more decentralised

ecosystem.

Ecosystems will play a pivotal role in driving progress and unlocking the full transformative power of

blockchain. By aligning market participants and incentivising collaboration, the industry can move towards a

more decentralised and efficient future, where liquidity becomes the cornerstone of a robust secondary market

for tokenised assets.

A Final Consideration: Is the Industry Ready to Engage the Buy-side?

Financial institutions have been receiving feedback from customers, particularly from the buy-side, expressing

their desire for access to digital and tokenised assets. Addressing these challenges requires thorough

examination of the legal and regulatory framework surrounding tokenised assets, including defining their legal

representation.

For instance, if an asset manager, private bank, or wealth manager receives a tokenised asset, they need clarity

on how to handle and store it within their existing account structures. Ensuring seamless integration into the

tokenised ecosystem is crucial, regardless of the asset type, whether it's bonds, swaps, structured products, or

commodities like gold.

The industry is yet to fully map and include all players involved in the lifecycle of a security when it is issued in a

tokenised format. While some progress has been made in tokenising bond issuance, the full lifecycle is still

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incomplete. Key areas, such as repo, money market, and liquidity management, need to be integrated into the

tokenised world at an institutional level.

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Conclusion

There seems to be a prevailing sense in the Financial Services industry that several crucial components are yet

to converge, for a more widespread adoption of tokenisation. Successful scaling will need collaborative effort

and time, supported by the right technology infrastructure and emerging legal and regulatory frameworks for

issuance and trading within the regulated ecosystem.

Custody may seem uneventful when executed effectively and this invisible layer is foundational to wider

adoption of tokenisation. The harmonisation of protocols, workflows, activities, and frameworks across the

entire token lifecycle demands diligent governance and oversight to ensure the security of assets. This is where

technology infrastructure plays a crucial role, not only enabling seamless workflow and governance but also

facilitating effective communication and integration within the ecosystem.

It is critical to focus on technology enablers, thinking innovatively with consulting partners, systems integrators,

and core banking providers. Collaboratively, they can deliver the solutions the industry requires to truly

revolutionise finance and unlock the full potential of a tokenised economy.

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About Ecosystm
Ecosystm is a Digital Research and Consulting Company with its global headquarters in Singapore. We bring

together technology buyers, technology providers, and industry leaders together to enable the best decision-

making in the evolving digital economy. Ecosystm has moved away from the highly inefficient business models

of traditional research firms and instead focuses on research democratisation, with an emphasis on

accessibility, transparency, and autonomy. Ecosystm’s broad portfolio of consulting services is provided by a

team of Analysts from a variety of backgrounds that include career analysts, CIOs, business leaders, and

domain experts with decades of experience in their field. Visit ecosystm.io

About Metaco

Founded in 2015 in Switzerland, Metaco is an enterprise technology company whose mission is to enable

financial and non-financial institutions to securely build their digital asset operations. The company’s core

product, Harmonize™, is a mission-critical orchestration platform for digital assets. From asset-agnostic custody

and trading to tokenization, staking and smart contract management, the platform seamlessly connects

institutions to the broad universe of decentralized finance (DeFi) and decentralized applications (Web3 Dapps).

Metaco has established itself as the institutional standard for digital asset infrastructure, trusted by the world’s

largest global custodians, banks, regulated exchanges, and corporates. Its software and technology solutions

enable institutions to store, trade, issue and manage any type of digital asset – such as crypto and digital

currencies, digital securities, non-fungible tokens (NFTs) – with the highest possible security and agility.

www.metaco.com

About Point Zero Forum

The Point Zero Forum is a not-for-profit initiative of Elevandi and the Swiss State Secretariat for International

Finance to promote a policy and technology dialogue in Financial Services.

Every year, over 1,000 central bankers, regulators and industry leaders convene around a series of leadership

dialogues, public-private roundtables, deep dive workshops and networking opportunities to drive confidence,

adoption and growth of transformative technology, and assess and promote the appropriate governance and

risk frameworks.