Tokenisation Needs Strong Custody for Digital Asset Security

The financial landscape is undergoing a significant transformation with the rise of tokenisation, representing traditional assets as digital tokens on blockchain infrastructure. This shift is gaining global momentum, with companies like BlackRock launching tokenised money market products.

In India, regulators are actively exploring this frontier. SEBI and RBI are collaborating on a bond tokenisation pilot, poised to test the integration of these new digital assets within the existing financial framework.

The Core Benefits of Tokenisation

Tokenisation offers several compelling advantages for the financial system. These include:

Faster transactions: Digital tokens facilitate quicker settlement processes. Reduced reconciliation layers: Blockchain infrastructure can streamline back-office operations. Automated processes: Smart contracts enable automatic coupon payments and other financial actions. Accessible fractional ownership: Tokenisation lowers the barrier to entry for investing in high-value assets.

The Custody Conundrum

Despite these benefits, a critical component remains underdeveloped: robust custody solutions. Experts argue that while blockchain provides new transaction rails, the underlying need for secure asset protection persists.

Key questions arise regarding the governance and safety of these digital assets:

Asset holding: Who legally holds the underlying asset? Access control: How are permissions managed for tokenised assets? Transfer approval: What mechanisms ensure legitimate transfers? Recovery mechanisms: How are assets restored in case of compromise or error? Investigation procedures: What protocols exist for disputes or fraudulent activities?

Manhar Garegrat of Liminal emphasised that institutional custody must bridge the gap between digital representation and the physical asset. It needs to define permissions, ensure asset segregation, and provide clear recovery protocols.

India’s Pilot Test

India’s tokenised bond pilot, expected to involve less than Rs 500 crore, will utilise blockchain for securities and the digital rupee for settlement. This pilot is crucial for evaluating how digital assets interact with established financial infrastructure.

Success will be measured beyond just transaction speed, focusing on the seamless integration and stability of the system. Garegrat cautioned against viewing tokenisation as a complete replacement for existing market infrastructure, highlighting that blockchain alters the “rails” but not the fundamental requirement for institutions that build trust, especially during payment failures or key compromises.

India holds a distinct advantage with its sophisticated capital markets, established exchanges, depositories, and regulatory bodies. These existing frameworks offer a strong foundation for integrating new digital systems rather than necessitating the creation of an entirely parallel financial world.