What’s in a Token?
The OECD article on The Future of Tokenization is a useful summation of the current progress to a tokenised model for world commerce. I’ve long been an advocate of a system that restores trade to a transfer of tangible wealth, and tokenisation, in concept at least, provides a route to this goal. But it’s nothing new, in fact it could be argued that it’s the most ancient means of commerce. When an iron-age villager traded sheep for grain, their means of agreeing relative values required a form of tokenisation.
In the early eighties, several of my friends joined a scheme called, if I remember correctly, Great Lakes Trading. Google is unable to provide me with any information on it, and the futures brokerage that now operates under that name appears to be unrelated. Drawing on flawed recollections, I believe GLT worked on a token system wherein anything - and it could be anything - could be deposited and allocated a value in GLT credits. These credits could then be freely exchanged to make purchases, loans or most other such transactions. This was pre-Internet, but it worked, and investors could net high returns on the system’s growth. Ultimately it failed, I believe under pressures from revenue services.
The beauty of tokens is that like the sheep-for-grain exchange, they’re backed by assets, making them less susceptible to the actions of speculators. They also turn those assets into fungible liquidity. Avoiding the moral and economic questions surrounding UK inheritance tax, it’s a massive problem for inheritors who unexpectedly need to pay 40% of a two-million pound liability on a house that may not sell for a year. If the house could be tokenized, then the debt could be settled, if not easily, then at least with less financial upheaval. The total value of homes in the UK is around £8.7 trillion - more than 400 times the country’s trade deficit. Unlocking 10% of this value could transform the economy.
Tis a consummation devoutly to be wished.
In its paper, Tokenisation of assets and Distributed Ledger Technologies in financial markets, OECD sees distributed ledger technology (DLT) as an essential component of tokenization. To quote from the paper:
The tokenisation of assets, involving the digital representation of real assets on distributed ledgers (digital twins) or the issuance of traditional asset classes in tokenised form (native tokens), excluding crypto-assets, is a core part of this technology’s revolutionary potential (OECD, 2020)
OECD goes on to highlight the need for financial supervisors to understand DLT technologies. This is a requirement that seems inadequately present so far. It’s tempting to believe that a blockchain is a blockchain is a blockchain - and that blockchain is all you need1. In this consideration, sustainability becomes as important as security. Bitcoin is estimated to consume around 127 terrawatt hours of electricity a year2, emitting between 25 and 50 million tons of CO2 a year3. to put that in proportion, its carbon footprint is somewhere between that of Cuba and North Korea.
Proof-of-stake chains, such as that operated by Ethereum, use significantly less energy, but still well into gigawatts per year, yet few financial managers seem to be aware of the distinction, or the overall environmental impact. What may attract more attention is the question of cost - all that computing power has to be paid for.
Describing the Asset
If asset tokenisation is to become widespread, it has to deal with an infinite range of variables. For a house, location4, number of bedrooms, parking, condition and countless other attributes play a part, while a ship would require a completely different set of descriptors - and any of these may be subject to change.
As both Bitcoin and Ethereum chains operate on low-capacity blocks, complex data sets such as this can become fragmented across blocks, slowing response and greatly increasing the management overhead. More modern chains such as Arweave, Filecoin, Storj, Sia and our own DotLedger have a much higher capacity5.
From this it can be seen that the choice of distributed ledger technology will be crucial to effective tokenisation. But we must also consider where all this data is to be stored.
The Jurisdiction Question
Tokenisation is an ideal mechanism for international trade. It can make asset ownership fractional and allow instant value transfer, but crossing borders implies a change of jurisdiction. Where regulations stipulate in-region storage of data, this may present a barrier. It’s this circumstance that dictates the need for a federated ledger. This architecture allows nodes to be located in multiple regions, and for each node to control its own privacy. Information can be shared to support a transaction as it would in a single ledger without compromising regionality or local privacy regulations.
Why is Tokenisation Happening So Slowly?
The benefits of asset tokenisation are widely accepted, yet its adoption so far is limited to scattered pilots and sandboxes. While certain legislative issues, such as ownership, need to be resolved, I submit that much of the delay stems from questions regarding the availability of viable technologies. The choice of the right DLT network to power a global mechanism has so far raised more questions than answers. Yet answers do exist, and we stand ready to provide them. Launched early in 2024, our federated ledger is already running at a rate of more than two billion dollars a year, but its energy footprint is considerably less than a single household. Later in 2025 it is to be the core technology behind a groundbreaking financial system to be launched by one of the world’s biggest household names.
The answers are here, and the opportunity is waiting.
1 .With or without a guitar solo by George Harrison
2 . Source: Forbes - Why Does Bitcoin use so much energy?
3. Source : Whitehouse.gov
4. According to a popular UK TV programme, this would occupy three fields
5. DotLedger’s blocks are of unlimited size and can contain multiple types of data, allowing title deeds, service histories and other identifying and descriptive documents to be held in a single block