To tokenize an asset is to represent a claim on it as a token on a programmable ledger. The asset might be a bond, a fund share, a deposit or a warehouse receipt. The token changes the plumbing; the economic and legal substance still has to be built underneath it.
Five stages
- Define the asset and the rights a holder will have, in legal documents that can be enforced.
- Issue tokens in an amount that matches the asset or reserve behind them.
- Record ownership on the ledger, and decide whether that record is the legal register.
- Hold and transfer the tokens, directly or through a custodian, within any transfer restrictions.
- Redeem the token for the asset or cash, or retire it at maturity and remove it from supply.
Why central banks are interested
In its 2023 Annual Economic Report, the Bank for International Settlements set out a “unified ledger” in which tokenized central bank money, tokenized deposits and other tokenized assets could sit together, so that payment and delivery happen in one step. Project Agorá, led by the BIS with central banks and private financial firms, explores that idea for cross-border payments.
Where the risks hide
A BIS Financial Stability Institute paper from 2023 surveys how regulators are approaching crypto-assets, tokens and decentralized finance. Across the lifecycle, the recurring risks are mismatches: between the token and the legal right, between the on-chain record and the official register, and between the speed of transfer and the speed of redemption.
The interactive lifecycle on the Digital Assets page pairs each stage with one question to ask before trusting a tokenized product.