Central banks all over the world, including the Bank of England, are exploring how tokenisation could improve how we move financial assets (such as money or shares) around in the economy.
We want to help come up with new and improved ways of doing this, while making sure the financial system stays stable and your money is still protected.
So...
What is tokenisation?
Tokenisation is where you create a digital version of a financial asset – such as a share, bond or a pound – that can be tracked and traded online.
The digital version is recorded on a secure, shared ledger (like an online list), which helps its owner(s) and other authorised users keep up to date with who owns what.
Putting it on that list then creates a 'token', which is essentially just a piece of computer code. This is then attached to a software programme, which makes it possible for the owner to use it in lots of new ways.
So, tokenisation does not automatically mean creating a new asset. It is just a new way of keeping a record of where it all is and who it belongs to. This, in turn, allows the owner to spend/transfer/trade what they have in ways they couldn't before.
Is it the same as cryptocurrency?
This is not the same as 'crypto'.
Cryptoassets (such as Bitcoin) are privately created tokens with no assets backing them up and highly volatile price moves. Their value tends to move up and down a lot over a short space of time. That is because they are not backed by real assets; their value depends on shared belief – people buy them because they expect others will be willing to buy them too. This makes them a risky option and is one reason why they are not widely used to pay for things.
Tokenisation, by contrast, is just a new way of recording and transferring assets that already exist. Its purpose is to modernise the financial system, not create new assets whose value mostly depends on what people are willing to pay at a given time.
How is the Bank involved?
Our role is to support innovation, while making sure money stays safe and the financial system remains stable. Our priorities include:
- setting rules for new forms of digital money
- improving the way money and assets move around, so new digital forms can work safely alongside existing ones
- testing ideas on a small scale before they are used more widely
How will it affect me and how I pay for things?
The Bank's vision for the future, is an economy that promotes competition and offers more choice of ways to pay.
Traditional and tokenised money would be exchanged seamlessly. So, for example, when shopping online, a payment you make with a tokenised asset could instantly credit the retailer's bank account, but only once you confirm the parcel has been delivered.
And the UK's retail payments system will be able to interact more seamlessly with those overseas. Reducing the amount of steps and people involved in the completion of a payment could lower the cost of moving money internationally. So, you could send an online banking payment to a friend abroad faster and cheaper on average than today.
What are the other benefits?
Tokenisation has the potential to improve retail payments and how banks and large firms do business with each other.
It could:
- speed things up: by cutting down the number of steps or people involved, transactions could complete almost instantly
- automate tasks: eg programme payments to be made automatically when they're due or based on certain conditions
- allow assets to be split into smaller pieces: so that people can invest smaller amounts, eg owning a share of a financial investment rather than the whole thing – this makes some types of investments more accessible to a wider range of people
More competition, from a wider range of technologies and business models, should lower costs and make things easier for users.
In retail payments, people will have more options when paying in-store or online. Alongside traditional bank deposits, people could have the option to pay with tokenised ones, regulated stablecoins and, potentially, a central bank digital currency (CBDC).
In wholesale financial services (used by banks and businesses), we want tokenisation to lower costs and make things simpler. It could make it cheaper for individuals to invest their savings – including through their pensions – in shares and bonds that companies issue to raise money.
In wholesale payments (made between banks and businesses), things could happen much faster and automatically. A supplier in the UK sending goods to a firm overseas could be paid as soon as delivery is confirmed, reducing the problem of late payments for small businesses. A company could invest spare cash overnight and get it back quickly the next morning, giving it more flexibility. And large global firms could move money instantly between their own accounts during an emergency or crisis, even across different currencies.
