The Bank of England’s Securities Lending Committee reviewed developments on tokenized collateral, according to released minutes. Tokenization is the digital representation of underlying collateral (equities, fixed income, or cash) that are traded on a blockchain.
From a liquidity perspective tokenization was suggested to provide five benefits:
- Instant settlement, which can reduce settlement risk and thereby negates the need for intra-day liquidity
- Settlement precision, as to-the-minute settlement can allow firms to know exactly when they can get intra-day liquidity thus allowing for more dynamic use in triggering intra-day liquidity needs
- Mobilization of liquid collateral. This offers the ability to tokenize a range of illiquid assets such as loans, which thereby increases the potential pool of assets that firms can use as liquidity
- Reduced collateral realignment and reducing operational costs and frictions
- Enhanced commercial value
The market is very much in its infancy, but on paper, has the scope to grow rapidly and provide significant revenue earnings and cost saving opportunities. Significant recent progress in market development was noted.
The development of digital cash is taking longer. Central Bank Digital Currency (CBDC), and stable coin development was thought likely to aid the transition process. Members saw stable coins as being more actively used in the next year or so, and that will in turn lead to their broader adoption of digital cash. .
Other topics covered included: market trends and observations; ISLA’s developments on the Common Domain Model; environmental, social and governance (ESG) in securities lending; and diversity and inclusion issues.