Tokenisation of Assets and Distributed Ledger Technologies in Financial Markets

The Organisation for Economic Co-operation and Development (OECD) has published a report, “Tokenisation of Assets and Distributed Ledger Technologies in Financial Markets.” This publication delves deep into the transformative potential of tokenisation while candidly addressing the impediments that have so far restrained its widespread adoption. This article provides a detailed exploration of the report's findings, elaborates on the current state of tokenisation, its potential impacts, and offers a way forward for stakeholders in this emerging landscape.

Understanding Tokenisation

Tokenisation represents a significant evolution in how financial assets are managed and traded. It involves converting real-world assets, such as securities, real estate, or commodities, into digital tokens on distributed ledger technologies (DLTs). These tokens can either be digital representations of existing assets ("digital twins") or entirely new forms of tokenised instruments ("native tokens").

By leveraging DLTs, tokenisation enables the creation of decentralised, immutable records of ownership and transaction history. This innovation has the potential to disrupt traditional financial systems by removing inefficiencies, reducing costs, and enabling new forms of asset ownership and trading.

The Current State of Tokenisation

Tokenisation remains in its infancy, with most applications limited to pilot projects and experimental phases. While some financial institutions have successfully tokenised assets such as bonds, equities, and real estate, these initiatives are largely isolated and lack the scale to drive significant market transformation.

Key highlights of the current state include:

1. Fragmented Ecosystems: Pockets of tokenisation exist, but they are often siloed, lacking interoperability and connectivity with traditional financial systems.
2. Pilot Programs: Governments and private institutions are conducting experiments to assess the feasibility and benefits of tokenisation. Notable examples include Switzerland’s Project Helvetia and the UK’s Digital Securities Sandbox (DSS).
3. Private vs Public Networks: Most initiatives leverage private permissioned DLTs, as these provide better control and compliance. However, they limit scalability and interoperability compared to public permissionless DLTs.
4. Regulatory Uncertainty: Varying legal frameworks and definitions of tokenised assets across jurisdictions have created ambiguity, slowing down widespread adoption.

The Potential Benefits of Tokenisation

Tokenisation’s theoretical advantages are compelling and could redefine financial systems:

1. Efficiency Gains: Automation through smart contracts can reduce manual intervention and operational costs. By disintermediating processes, tokenisation accelerates transaction times and enhances cost-effectiveness.
2. Improved Liquidity: Fractional ownership allows traditionally illiquid assets, such as real estate, to be traded in smaller units, increasing accessibility for a broader range of investors.
3. Transparency and Traceability: The immutable nature of distributed ledgers ensures that all transactions are recorded permanently, enabling better audit trails and improved trust.
4. Faster Settlement Cycles: With the potential for near-instant settlement, tokenised markets could eliminate counterparty risks associated with delayed settlements.
5. Product Innovation: DLT enables programmable financial products, such as smart bonds, which can automatically execute functions like coupon payments.
6. Cost Reductions: Reduced need for intermediaries and back-office operations translates into lower costs for both issuers and investors.

Challenges Hindering Adoption

Despite its potential, the OECD identifies several obstacles slowing tokenisation’s adoption:

1. Ecosystem and Liquidity Issues: A lack of critical mass among issuers and investors has created a "chicken-and-egg" problem. Without sufficient participants, liquidity remains low, which in turn deters broader adoption.
2. Integration with Payment Systems: The absence of integrated payment mechanisms, such as wholesale Central Bank Digital Currencies (wCBDCs), limits the seamless execution of transactions.
3. Legal and Regulatory Uncertainty: Ambiguities around ownership rights, the enforceability of smart contracts, and cross-border regulatory alignment create risks for both issuers and investors.
4. High Transition Costs: The financial and technological investments required to transition to DLT-based systems are significant, particularly for institutions encumbered by legacy infrastructure.
5. Interoperability Challenges: Fragmentation among private and permissioned DLTs undermines scalability and prevents network effects from materialising.
6. Custodial Services: Trusted custodians to bridge traditional and tokenised systems remain underdeveloped, limiting investor confidence.
7. Technological Complexity: Issues such as scalability, cybersecurity risks, and interoperability between DLT networks add layers of complexity that deter adoption.

The Way Forward

To overcome these challenges, a multi-stakeholder approach is necessary. The OECD report provides actionable recommendations for policymakers, financial institutions, and technology providers to drive tokenisation adoption.

Policy Implications and Recommendations

1. Standardisation: Developing global standards for data, messaging, and identifiers can facilitate interoperability and integration with traditional financial systems. Initiatives like the ISO Digital Token Identifier (DTI) standard are promising steps in this direction.
2. Public-Private Collaboration: Coordinated efforts between governments, central banks, and private entities can accelerate the development of tokenisation ecosystems. Projects like Switzerland’s Project Helvetia and the BIS’s Unified Ledger initiative demonstrate the power of collaboration.
3. Regulatory Harmonisation: Establishing clear and consistent legal frameworks across jurisdictions is critical to addressing uncertainties around tokenised assets and smart contracts.
4. Education and Capacity Building: Policymakers and financial supervisors must deepen their understanding of DLTs to provide effective oversight and foster innovation.
5. Incentivising Adoption: Governments can provide tax incentives, grants, or other financial support to encourage institutions to invest in tokenisation infrastructure.

Technological Advancements

1. Integration with Traditional Systems: Hybrid models that combine DLTs with existing financial infrastructure can ease the transition and allow participants to gradually adopt tokenisation.
2. Enhancing Scalability: Research into more efficient consensus mechanisms and interoperability solutions can address scalability and performance issues.
3. Strengthening Cybersecurity: Robust cybersecurity frameworks are essential to mitigate risks associated with DLT systems.

Future Outlook and Impact

Short-Term Prospects

In the near term, tokenisation will likely remain concentrated in niche markets and pilot projects. Early use cases such as tokenised bonds, real estate, and private equity are expected to gain traction as ecosystems mature and regulatory clarity improves.

Medium-Term Opportunities

As interoperability improves and infrastructure investments increase, tokenisation could expand into mainstream markets. Integration with wCBDCs and global standards will be pivotal in scaling adoption across asset classes.

Long-Term Transformation

In the long run, tokenisation has the potential to democratise access to financial markets, enhance global liquidity, and redefine asset ownership. By enabling fractionalisation and automation, tokenisation can make financial systems more inclusive, efficient, and transparent.

Economic and Social Impact

• Increased Financial Inclusion: Tokenisation can lower barriers to entry, enabling retail investors to access previously exclusive markets.
• Enhanced Global Connectivity: Interoperable tokenised ecosystems can facilitate cross-border transactions, boosting international trade and investment.
• Sustainability and Innovation: Tokenisation’s programmability features can support green finance initiatives, such as the issuance of digital green bonds.

Conclusion

Tokenisation represents a pivotal moment in the evolution of financial systems. By addressing current barriers and fostering innovation through policy, collaboration, and investment, the financial sector can unlock unprecedented efficiencies and democratise access to investment opportunities. The OECD report provides a roadmap for this journey, urging stakeholders to seize the potential of tokenisation while safeguarding market integrity.

As nations and industries work together to overcome challenges, tokenisation’s promise of a more inclusive, transparent, and efficient financial system could soon become a reality. The future of financial markets is being shaped today, and tokenisation stands at the heart of this transformation.

Citations: OECD (2025). Tokenisation of Assets and Distributed Ledger Technologies in Financial Markets. https://www.oecd.org/en/publications/tokenisation-of-assets-and-distributed-ledger-technologies-in-financial-markets_40e7f217-en.html