Citi Perspectives 2024 E-commerce Edition

Of course, aspects of tokenization need improvement and development before it could be adopted as the natural successor to the current regulated financial system. That said, as it stands today, with background work ongoing, tokenization represents an excellent opportunity to deliver more efficient global, 24/7, secure, real-time financial transactions. And for corporate treasurers, the potential of tokenization should at least place it high up on the list of serious homework topics. Back to school “Leaving financial services and blockchain aside, a token is simply a representation of something else,” explains Tony McLaughlin, Managing Director, Emerging Payments & Business Development, Citi. Generally, it is a stand-in that holds the same value, but is not the same as, the artefact it represents. A cloakroom ticket, for example, is a temporary stand-in for the theatergoer’s coat; it is not the coat but is redeemable for that specific item and no other. As a practice, tokens of this nature have existed for millennia. But a token in the blockchain world removes the tangibility of “one thing representing another,” occurring (as opposed to existing) entirely in the digital domain. But a digital token is nonetheless a representation. To help further understand the idea, McLaughlin harks back to the original 2008 bitcoin whitepaper by Satoshi Nakamoto. This describes a peer-to-peer (P2P) electronic cash system, based on an electronic representation — a token — of a coin. That electronic coin (bitcoin, as it is now known) is defined by a unique string of digital signatures, captured within a blockchain. “The blockchain is a means of unambiguously determining who owns what, and it does this through public key cryptography, involving a public and private key pairing,” explains McLaughlin. Bitcoin can be transferred only by the private key holder of that coin signing their ownership over to the beneficiary’s public key. The moment that exchange is written into the bitcoin network, the new owner unambiguously has control of it. The coin can then only be transferred using the new owner’s private key, to which they have exclusive access (assuming its security has not been compromised). The crucial difference between bitcoin and other tokens, such as the cloakroom ticket, is that bitcoin is not a representation of anything other than itself; there is no underlying asset for which it is a stand-in. This is both its strength and weakness, of which more later. When Ethereum emerged, it enabled digital tokens to assume a far more general representative status. This meant digital tokens could now stand in for literally anything, from cryptocurrencies to artworks to cloakroom tickets. “The question then comes down to the utility of representing many different financial assets on a common computer system, and whether or not those tokens really represent the movement of underlying assets with legal certainty,” suggests McLaughlin. Accepting the idea As mentioned, bitcoin tokenization is self-referential: there is no “bitcoin” external to the network itself. Ethereum’s utility means it can represent self-referential tokens such as cryptocurrencies, but it can also represent anything else, including real-world financial assets. “The supposition is that if a token is transferred in the blockchain, then the real-world ownership of its underlying asset is transferred too,” says McLaughlin. “Proponents of tokenization suggest that the financial world could be made considerably more efficient if there were a venue where all manner of different tokens [financial or otherwise] could be exchanged, with a legal framework outside of that platform that would provide certainty of such transfer or settlement.” Legality arguably should not be an issue. This modern take on representation should in effect be no different to the paper-based expression of, for example, debt instruments or equities, which have been accepted in law for a long time. The digital tokenization 32 | Services Citi Perspectives