Tokenisation Explained: How Could It Affect The Economy?

Imagine you buy a small share of a bond, money lent to a government or company. Instead of recording your holding only in a conventional account system, the provider records it as a digital token.

That is the basic idea of tokenisation: representing a claim on an asset on a programmable platform. The asset might be a bond, a fund holding or a right linked to something physical. The token is the digital representation. Its legal documents explain what you actually own or can claim.

What does the token change?

Ordinary finance already uses digital records. Tokenisation adds a way to combine an asset's record with rules for how it moves.

A BIS Bulletin describes two connected layers: information about the asset and its ownership, and a service layer containing the platform's rules. A smart contract is software that carries out instructions when specified conditions are met.

For example, a system could transfer a bond token only when payment is available. It could also restrict transfers to eligible holders. Programmable doesn't mean free of rules. The rules become part of how the platform processes transactions.

Does a property token mean I own a building?

Not necessarily. A token can represent different rights. In an invented example, a building owner could offer a token linked to a share of rental income. Another arrangement could give its holder a stake in a company that owns the building.

Whether either arrangement puts a holder’s name on the property title depends on its documents and the law that applies. A share of rental income and a stake in a company are different claims, with different responsibilities and routes for enforcing them.

The Law Commission of England and Wales explains that digital assets can be valuable things in themselves or can represent, or be linked to, other things and rights. That distinction matters: control of a token and legal ownership of the asset it refers to are separate questions.

A building also remains a physical building. Somebody must maintain it, collect rent and deal with disputes. Recording a claim digitally doesn't perform those jobs.

How could buying and selling become simpler?

Consider two people exchanging a bond and money. One person doesn't want to hand over the bond and wait to discover whether payment arrives. The other doesn't want to pay first and hope the bond follows.

A token platform can connect the two transfers so that one happens only if the other does. This is called delivery versus payment. The BIS describes this as a possible use of programmable platforms, alongside automating other linked financial transactions.

The potential benefit is fewer separate messages and records to reconcile, meaning fewer differences between the parties' books to investigate. This can reduce processing work. It doesn't guarantee instant settlement in every arrangement or remove the need to know whose money is paying for the token.

There is a legal question too. The BIS and its payments committee distinguish a ledger update from final settlement. Finality means the transfer is legally complete and unconditional, including if a participant later becomes insolvent. The two moments need not coincide, so a completed screen update alone may not settle the legal obligation.

Could that affect businesses outside crypto?

The practical case is about reducing work behind financial transactions. The BIS describes combining messaging, reconciliation and asset transfer in one process, instead of updating separate records in sequence. Any savings depend on how the system is built and used.

Tokenisation can also represent smaller interests in an asset. In our bond example, the provider could record smaller interests instead of requiring one buyer to take the whole holding. That describes a possible product design. Minimum purchases, distribution rules and service costs can still restrict who can participate.

The BIS and its payments committee describe potential reductions in transaction costs and new uses of financial assets. They also stress that achieving those benefits requires sound governance and risk management. A token is part of a financial arrangement, rather than a shortcut around building one.

Is this already being tested?

Yes. The Monetary Authority of Singapore's Guardian initiative brings together financial institutions and policymakers to develop tokenised finance. Its work includes funds, bonds, bank liabilities and payments across currencies.

The initiative also works on common standards and connections between platforms. Those details affect whether a token created in one system can be traded or settled in another. Separate digital islands can preserve the same coordination problems a shared platform is meant to reduce.

These examples show institutions working on the machinery. They don't establish that every product marketed as a real world asset token has equivalent rights, controls or access.

What can still go wrong?

The underlying asset can lose value or fail to produce the promised income. Software can fail too. A secure digital record cannot repair a poor loan or make an empty building earn rent.

The Financial Stability Board's October 2024 report identifies familiar financial vulnerabilities in tokenisation, including leverage and liquidity mismatch. Leverage means using borrowing to increase exposure. Liquidity mismatch can arise when holders expect quick exits from assets that take longer to sell.

The report also identifies operational fragilities and connections to the wider financial system. Shared infrastructure can reduce duplicated work while making its reliable operation more important to everyone using it.

For our bond buyer, the important questions concern the claim the token gives them, who must honour it and when the exchange becomes final. The value of that promise still depends on the asset, the legal arrangement and the people responsible for delivering it.