Tokenisation Is Shaping A New Financial System. Here's What's Missing

As investment costs soar, fractional ownership is taking over the world of finance. Globally, people are beginning to buy a fraction of a house, a government bond or a mutual fund through a digital token. Thus, this process is called tokenisation.Global financial institutions are already putting traditional assets on blockchain-based infrastructure. BlackRock, for instance, has launched tokenised money market products, including an on-chain share class of an existing fund. Meanwhile, in India, the Securities and Exchange Board of India (SEBI), in coordination with the Reserve Bank of India (RBI), is also working on a bond tokenisation pilot. The idea is simple. Put a financial asset on a blockchain and some of the processes around it can become faster and more automated. Earlier, tokenisation was largely discussed in the context of crypto. Now, banks, asset managers and regulators are looking at blockchain as a possible new layer for mainstream financial markets. Bonds, funds and other securities can be represented digitally and transferred through blockchain-based systems.Transactions could settle faster. Some layers of reconciliation could be reduced. Certain processes, such as coupon payments, could potentially be automated through smart contracts. Tokenisation could also make fractional ownership easier in some asset classes. Eventually, this could open products that were once difficult to divide, transfer or access digitally to a wider pool of investors.But there is a catch. A digital token does not automatically make the underlying financial system safer.The Missing Piece: CustodyAccording to experts, this is where the conversation needs to move beyond blockchain. Once an institution owns a tokenised asset, someone still has to protect it.Where is the asset held?Who can access it?Who can approve a transfer?What happens if a private key or other credential is compromised?What happens when a transaction is made by mistake?And if something goes wrong, who can investigate it and recover the asset?These are not new questions for financial markets. They are simply taking a new form. Banks protect money. Demat accounts hold shares. Registries establish and record ownership of property.Similarly, tokenised finance will need an equally dependable framework around digital assets. Manhar Garegrat, Country Head, India, Liminal, told NDTV that this is where the next phase of tokenisation will be decided. He says institutional custody has moved beyond simply holding an asset. "The infrastructure must connect the digital representation to the underlying asset, define transaction permissions, ensure proper segregation and provide a recovery mechanism when things go wrong."In other words, the blockchain can execute the transaction. But the financial system still needs to explain, verify and govern that transaction throughout its life.India's Bond Pilot Will Be An Important TestIndia's proposed tokenised bond pilot offers an early test of this idea. The proposed REC issue, expected to be below Rs 500 crore, is likely to use blockchain-based securities infrastructure and the digital rupee for settlement. Investors may need separate digital wallets for the currency and securities sides of the transaction. This makes the pilot more than just a blockchain experiment. It will test how existing financial infrastructure interacts with digital assets. The success of the exercise, therefore, cannot be measured only by whether a bond is issued faster.Garegrat describes India's first tokenised bond as a milestone in the country's financial digitisation, but cautions against viewing tokenisation as a replacement for existing market infrastructure. "The blockchain may change the rails. It does not remove the need for institutions that provide trust."Garegrat adds that financial systems are not judged only when everything works. "They are judged when a payment fails. When a key is compromised. When two parties dispute a transaction. When a counterparty defaults. Or when a regulator needs to intervene. That is when custody, governance and accountability become critical."Thankfully, India does not have to build a financial system from zero. It already has large and sophisticated capital markets, established exchanges and depositories, digital public infrastructure and regulators that oversee millions of investors and transactions.This gives the country an unusual advantage as tokenised finance develops. The opportunity is to bring these systems together rather than build a parallel financial world.