Professor Alistair Milne, of Loughborough Business School, argues that many of the improvements promised by a technology known as ‘tokenisation’ could instead be achieved by upgrading the systems we already have.
Tokenisation is an idea attracting considerable attention from banks and governments. It involves creating a new digital version of an asset, such as money, shares or bonds, and recording it on a new type of digital system.
Supporters believe this could make moving money and investments around the financial system quicker and more automatic.
However, Prof Milne argues there may be a simpler alternative, which he calls ‘direct holding and control’.
This would allow investors to hold their money and investments directly on the official systems that record who owns them, and securely authorise transactions themselves, rather than relying on a chain of banks and other organisations to do this for them.
His new paper, Direct holding and control of financial assets: An alternative to tokenization, published by SUERF, the European Money and Finance Forum, argues that this approach could provide many of the benefits promised by tokenisation without creating complicated new financial systems.
Prof Milne said: “The problem is that the financial system has developed many different layers.
“For example, when a large investor buys an investment, the money and the investment itself may be held by different organisations.
“Several companies and computer systems can therefore be involved in completing the transaction, passing instructions between each other and checking their records agree.”
The paper proposes cutting out some of these unnecessary steps.
Most money and investments are already held digitally, meaning that creating new digital versions of them may not be necessary.
Instead, Prof Milne argues that direct holding and control could allow transactions to be completed more efficiently using existing official financial systems combined with secure digital technology.
The result could deliver many of tokenisation's promised benefits, including faster transactions, fewer administrative processes and more efficient movement of money, without rebuilding the financial system from scratch.
Prof Milne also warns that tokenisation faces a practical problem: new financial systems only become useful if enough banks and other organisations agree to use them.
If only some adopt the technology, tokenisation could actually make the financial system more complicated by adding yet another system that needs to communicate with all the others.
Professor Alistair Milne is available for media interviews about tokenisation, digital money, payments and the future of banking and financial technology.
Professor Milne previously worked at the Bank of England and HM Treasury and was a member of the Bank of England's CBDC Academic Advisory Group. He works with central banks and financial regulators around the world.
ENDS