Tokenisation and Programmable Money

Tokenisation is the process of representing a real world asset, such as a bank deposit, a bond, or a property, as a digital token on a ledger, so that it can be transferred and settled more efficiently. A tokenised deposit is a digital representation of a deposit held at a commercial bank, and it can be transferred between parties on a shared ledger with settlement happening at the same time as the transfer, a concept known as atomic settlement. This removes the gap between agreeing a trade and settling it, which is where much of the risk and cost in financial markets comes from. Banks and market infrastructures are testing tokenised deposits and tokenised securities for use in bond issuance, repo transactions and cross border settlement, and the early results suggest that settlement times can fall from days to minutes. Programmable money builds on tokenisation by adding rules to the money itself. A payment can be programmed to release only when a condition is met, such as the delivery of goods, the completion of a service, or a date in the future. This is useful in trade finance, where a buyer wants to pay only when the shipment arrives, and in supply chains, where a payment can be split automatically between several parties when a sale is made. It is also being explored for government payments, where funds could be restricted to a particular purpose, such as a grant that can only be spent on approved goods. The technology for this is a smart contract, a piece of code that runs on a ledger and executes the payment when its conditions are satisfied, without any manual intervention. The practical challenges are significant, and a BA should be aware of them. Legal certainty is the first, because a court must recognise that a token transfer is a real transfer of the underlying asset, and that a smart contract payment is legally binding. Interoperability is the second, because tokens on one ledger must be able to move to another ledger, and the industry has not yet agreed on common standards. The third is operational, because a bank that issues tokenised deposits must still manage liquidity, reconciliation and regulatory reporting, and the old systems must talk to the new ones. Tokenisation is best understood as an evolution of existing market infrastructure, not a replacement for it, and the banks that succeed will be the ones that connect the new token world to the old account world cleanly. Tokenisation is the process of recording an asset on a distributed ledger as a token, and programmable money is the ability to attach conditions to that token. A tokenised deposit can be programmed so it can only be spent on a specific purpose, or only released when a condition is met, such as the delivery of goods. A smart contract is the code that enforces the condition: when the goods are delivered, the contract releases the payment automatically, without human intervention. The use case that best illustrates this is trade finance, where the payment is released when the shipping documents are presented, and the smart contract checks the documents and releases the funds. Atomic settlement is the property that makes tokenisation valuable for payments. In an atomic settlement, the payment and the delivery of the asset happen together, in a single transaction, so there is no risk that one party pays and the other does not deliver. The traditional settlement has a gap: the buyer pays, then waits for the delivery, and during the gap the seller could fail. Atomic settlement closes the gap, and the risk that is removed is the settlement risk, which is the risk that one leg of the transaction settles and the other does not. The Bank for International Settlements has called atomic settlement the most important benefit of tokenisation, and it is the reason central banks are testing it. The regulatory treatment of tokenised assets is still evolving, and the business analyst must track it. In the European Union, the DLT Pilot Regime, Regulation (EU) 2022/858, allows market infrastructures to test the trading and settlement of tokenised securities under a temporary exemption. In the United Kingdom, the Financial Services and Markets Act 2023 gives the Treasury the power to create a similar regime. In the United States, the treatment depends on whether the token is a security, which is determined by the Howey test. A tokenised deposit is not a security, it is a deposit, and it is regulated as a deposit. A tokenised bond is a security, and it is regulated as a security. The classification determines the licence, the disclosure, and the supervision.