NZ funds industry veteran and fintech pioneer, Binu Paul, explores how the ancient concept of tokens fused with modern digital technology is poised to radically reshape the future of financial services…
History may never repeat, but it definitely rhymes
It’s said that there is nothing new in this world except the history that you don’t know. So, it’s always a good place to start.
Throughout history, ‘tokens’ have been a versatile tool for representing value, facilitating trade, and managing resources in various societies. The concept of tokens continues to evolve, leveraging new technologies to meet the needs of modern economies and financial systems.
Around 5,500 years ago the Mesopotamians used clay tokens representing livestock, grain and other commodities for accounting purposes in a system that performed the three key functions of what we think of as ‘money’ today: enabling transactions; a store of wealth; and, keeping a record of account.
Roughly 2,500 years later the-then ascendant Roman empire turned to tokenisation to administer civic duties of its citizens, issuing wooden and bronze tokens for voting and jury selection, for example.
Later the Romans minted tokens out of bone, ivory and metal called ‘tesserae’ for a variety of purposes including food vouchers or passes to events.
Well past the collapse of Roman power, the merchants, towns and professional guilds of Medieval Europe were still using tokens to symbolise value or as a form of ‘credit’.
In some shape or form the same practices of linking tokens to ‘value’ or ‘credit’ has endured through the centuries and continue to this day – think of your wristband at the theme park or a concert, your arcade token or loyalty card etc.
However, the introduction of blockchain technology just over 15 years ago has kick-started a new era for tokenisation.
Blockchain-built tokens issued in a digital (non-physical) format are, arguably, more efficient and secure than the fragile clay tablets of Mesopotamia or the easily forged Roman tesserae.
And while the underlying token use cases have been incredibly similar over the 5,500 years of human history – representing value, assets, rights or utilities – the modern digital variant promises a step-change in benefits (that in many cases have been already realised) including:
- Cost reduction: tokens built on blockchains operate on a peer-to-peer basis without the need for intermediaries, which cuts down transaction and administration costs;
- Enhanced security and compliance: blockchain-based solutions are immutable records that, when built properly, provide far more secure and transparent protection of information compared to traditional databases. Recent developments in the technology now even enable embedding compliance as code into the product (further bringing down compliance-related costs);
- Liquidity boost: by breaking down large assets into smaller, tradeable units, tokenisation opens them up to a broader range of investors while simultaneously boosting market liquidity.
A wide range of industries stand to reap the rewards of this new technology with financial services, in particular, on the verge of significant transformation that offers the very real prospect of upending business models, rewiring market structures and shifting power to consumers.
Many businesses – in sectors including banking, funds management, real estate, arts and collectibles, intellectual property, venture capital and private equity – have already implemented real-world use-cases, or are at advanced stages of exploring and executing blockchain-based tokenisation initiatives.
The tokenisation of financial services appears to be an unstoppable historical force but the pace of change still hinges on a number of factors.
Regulation, technical hurdles, valuation concerns and the willingness of market participants to accept (and adopt) the new technology might delay the inevitable. History, however, is on the side of the tokens.
Part 2 of this article will delve into some of the challenges, provide real-world business examples of blockchain-based tokenisation while mapping out how the financial services sector can best navigate into the future.