Credit card firms use tokenisation to replace a client’s primary account number (PAN) with a token, which is essentially a randomly generated set of symbols which are useless to hackers if they were to access the token. A more simplistic way to think of tokenisation is if you go to a casino, you use cash to buy plastic tokens for use in the casino, with the key point being that the tokens themselves have no value outside the casino. According to the publication, fisglobal: “Tokenization reduces risk from data breaches, helps foster trust with customers, minimizes red tape and drives technology behind popular payment services like mobile wallets”. Therefore, it is of no surprise that payment firms have been using tokenisation with the benefits of tokenisation for businesses including the fact that:

• it reduces risk from data breaches 

• it helps foster trust with your customers 

• it means less red tape for your business

• it drives payment innovations

Meanwhile, given the growing understanding and increasing use of blockchain technology, organisations are now using this technology to tokenise not just data, but real assets such as stocks, debt instruments, real estate, commodities, and even cash in the form of central bank digital currencies (CBCDs) and stablecoins pegged to the $ or £ or € etc. Global investments company, BNY Mellon, is one of the global titans when it comes to assets that it looks after for clients, with over $43trillion of funds that it has in custody. It defines tokenisation as: “the process of converting rights - or a unit of asset ownership - into a digital token on a blockchain”, believing also that, “the benefits of tokenization are particularly apparent for assets not currently traded electronically, such as works of art or exotic cars, as well as those needing increased transparency in payment and data flows to improve their liquidity and tradability”.

Tokenisation of assets

Source: BNY Mellon

Listed below is what BNY Mellon believes are the benefits offered by tokenisation :

• reduced settlement times

• broader investor base 

• broader geographic reach 

• infrastructure upgrade 

• decreased cost for reconciliation in securities trading

• regulatory evolution

• improved asset-liability management

• increase in available collateral 

Whilst tokenisation of equities offers exposure to the gyrations of the underlying stock, e.g., Google, Apple, Mircosoft, etc, tokenised stocks do not offer the legal rights associated with share ownership at the moment - such as voting rights. If you buy a tokenised equity via FTX, you will currently not be able to vote on corporate actions. The same is true for tokenised stocks bought via Binance. However, a feature that could prove helpful for some investors is that FTX is aiming to pay all dividends gross of tax whereby doing away with the need for international investors to be compelled to reclaim tax from various jurisdictions. As well as not being able to vote, holders of tokenised equities also need to be mindful that presently you are unable to buy tokenised shares from one provider e.g., Binance, and sell them on another platform e.g., FTX.

When asked about tokenisation, Clauss Skanning, CEO of Danish firm, DigiShares (specialising in tokenising real world assets), said: “Tokenization is in its essence about digitization, automation, fractionalization, and liquidity. Due to the digitization of assets, we can automate transactions to an unprecedented level and this in turn leads to a massive cost reduction that enables fractionalization. Finally, tokenization enables peer-to-peer trading of assets with no counterparty risk, effectively increasing the value of assets with 10-30% through removal of the illiquidity risk”. Little wonder that both owners of assets and fund managers are looking to tokenise their assets. Also in Europe, 2Tokens, which is partially funded by the EU, is running a series of tokenisation projects to demonstrate the commercially viability of tokenisation in a variety of sectors. 2Tokens has so far been engaged in tokenising bills of landing for the Port of Rotterdam and the Digital Notary, tokenising share registers for notaries in Holland and is also tokenising solar energy parks with a firm called Sunified which has offices in Holland and Australia. Alex Bausch, chairman of 2Tokens, stated recently: “There is a genuine interest and demand for education around tokenisation outside of the financial sector. 2Tokens was founded to be an independent and neutral token advocacy group. Our objective to raise awareness, stimulate relevant discussions, and bring together academics and industrial practitioners to fully explore the real potential of tokenisation and help realize the broader societal benefits.”

By using blockchain technology and tokenising assets, financial institutions are able to become more efficient and improve their risk controls. An example of this is Vanguard, which is using blockchain technology and smart contracts to hedge its exposure to currency volatility. Historically, Vanguard has achieved this by creating swap contracts but now Mark Smith, CEO of fintech company, Symbiont, has said: “The smart contract calculates exactly how much collateral you need based on an initial margin calculation that’s agreed upon amongst the two counterparties. Historically, each side calculates margin on their own, and then they reconcile on an overnight basis or every two days manually to determine if both sides got the right margin variance calculation.” The financial implications of implementing blockchain technology are potentially significant. Roland Berger, has reported that the savings of €4.6billion by 2030 could be generated via tokenisation of share trading. Furthermore, the added transparency and ability to make income payments based on the time a bond, share or a property has been owned as opposed to being paid as income every six months (as is the case for equity dividends), holds much appeal for investors. However, whilst tokenisation offers many opportunities it is yet to be proven on an industrial scale. Clearly there is much education required for traditional regulated firms to understand the technology and compliance implications. This takes time, but already we are seeing assets managers such as Templeton, AllianceBernstein and JP Morgan all announce that they are to tokenise some of their mutual funds - and we are very likely to see other asset managers also follow them in the not-too-distant future. We spoke to Charles Kerrigan, at CMS Law, as one of London’s leading lawyers involved in a variety of tokenisation projects and he said: “ The legal and regulatory issues are now well established and we have experienced service providers supporting projects.  Some barriers remain, primarily that large projects take time to work through decisional processes and small projects can get caught up in securities laws if they don’t use exemptions to offer to the public.  Our experience is that the market is currently split in two: large (institutional) projects that take the time to work through all the issues to get a prototype stood up; and small (non-institutional) projects that tokenise debt or equity but don’t do a public offer.  There is less going on in the middle until the larger projects have proved it out and are public”.

So, it would seem tokenisation offers the potential to transform regulated financial markets as well as impacting on other less liquid assets such as real estate, art, cars etc. But with the tokenisation of cash and mutual funds, could this be the ‘killer’ use case of blockchain technology? Even with this in mind, let us not forget where tokenisation began - with payments with debit and credit cards and by making data transfers safer. The potential to tokenise other data such as loyalty schemes, our healthcare records, and even behaviour, all appear to point to our lives potentially being digitised, monitored and accessible. For many this does not sit comfortably, so one wonders just how far society will want this digitisation and tokenisation of our lives to permeate….

Porsche and blockchain

Source: Porsche

In February 2022, Porsche became the first auto manufacturer to successfully use blockchain technology in its cars, with Oliver Döring, Porsche’s financial strategist, announcing: “We can use blockchain to transfer data more quickly and securely, giving our customers more peace of mind in the future, whether they are charging, parking or need to give a third party, such as a parcel delivery agent, temporary access to the vehicle. We translate the innovative technology into direct benefits for the customer.” However, many other carmakers are exploring ways to integrate this game-changing technology into their vehicles. They are all aiming to take advantage of its potential to dramatically change how information or data is stored and used, subsequently enhancing transparency and security and improving transactions. Below is a selection of ways in which car makers are able to use blockchain technology:

• making user-friendly cars

Blockchains could be useful in helping drivers to unlock their vehicles; that is, the vehicle could be added to a blockchain, allowing the driver to communicate with it directly via an app. This would greatly speed up the vehicle's response time since instructions would no longer need to go through third-party servers. The integration could also enable car owners to grant others temporary access to their vehicles. The vehicle could be remotely unlocked via the app, granting a third-party or friend access into the vehicle. 

• improving autonomous driving systems 

Blockchain is a decentralised database of records that could improve autonomous driving systems. As a self-driving vehicle navigates the vicinity, the blockchain would record data about the journey which could range from information about regional weather conditions to general traffic patterns. Blockchain is able to share the data whereby allowing other vehicles in the network to then access this information. A blockchain-powered platform could give other vehicles access to other vehicles' data, which would be an essential part of the infrastructure required to enable level-five autonomous driving - Oculus believes this could be possible by as soon as 2030. In agreement with this, Toyota had already teamed up with MIT Media Lab back in 2017 to work out ways in which to use blockchain to speed up autonomous vehicle technology.

• ensuring materials are ethically sourced 

Two-thirds of the world's cobalt is mined in the Democratic Republic of Congo (DRC). Roughly 20% of this comes from artisanal unregulated mines that often exploit child labour, with about 400,000 children spending their days in these mines working for low wages under extremely dangerous conditions. Harnessing blockchain's ability to track supply-chains, a London-based blockchain start-up called Circulor aims to track cobalt from the time it leaves a mine until it reaches a manufacturer. The company is already testing the process using ‘clean’ cobalt from countries such as Canada and Australia. Furthermore, the company could refuse to track the cobalt of any mine that does not meet certain standards (including safe working conditions or adult workers), consequently driving the unethical mines out of business. Meanwhile, as long ago as 2018, BMW announced it was working with Circulor to ensure the cobalt it uses for its electric vehicles' (EV) batteries is ethically sourced. 

Automotive blockchain-based services

Source: Researchgate

• facilitating eco-friendly driving

Daimler AG Mercedes Benz has a project based on its own blockchain-based cryptocurrency, mobiCOINS, with five hundred drivers being selected as a test group. For three months, they will be receiving mobiCOINS when they operate their vehicles in environmentally friendly ways such as maintaining a low driving speed, switching the engine to eco-mode, coasting to a stop, etc. The vehicle shares the driving data with a special app and appropriate mobiCOINS are deposited into the driver's account - anyone who makes enough coins becomes eligible to win prizes. This is a good way to encourage drivers to operate their vehicles in environmentally responsible ways.

• financial transactions 

Although blockchain's ubiquity is becoming evident with time, previously people had thought of cryptocurrency, such as Bitcoin, when the topic of blockchain had arisen. Many companies, such as Porsche, are utilising the financial roots of blockchain technology. A Canadian company called SWITCH is using blockchain technology to enable vehicles to use the power in their batteries to be put power back into the grid at times of high electricity demand and then recharge the vehicles in the middle of the night when electricity demand is low. In the UK, Energy Web has partnered with Vodaphone and Mastercard and, by using smart contracts on the blockchain, the appropriate amount of money is deducted from your account and sent to the charging station when charging your EV. This smartphone app integrates with the user's existing mobile wallet and automatically communicates with any charging point that accepts Mastercard payments. It is the latest evolution of Vodafone’s Internet of Things (IoT) technology by which motorists no longer have to use multiple apps for each charging point network they use. The financial applications of blockchain could also extend to buying, selling or transferring vehicles. A smart contract that sends in your car payment on the first of the month could be created, whereby the transactions would be recorded on the blockchain technology and would cease making payments once the account reaches $0/€0 or £0. Also, you could buy a car using cryptocurrency from businesses that accept crypto debit cards. Many trusted auction organisations such as Mecum Auctions accept cryptocurrency-based debit cards e.g. BitPay.

• automotive blockchain market

Increasing focus on better quality control, reducing manipulation of data and the need for faster business transactions have prompted the growth of the automotive blockchain market.

Automotive blockchain market

Source: MarketsandMarkets