Tokenisation Could Fix India’s Most Ignored Risk

After a long search for real-world blockchain or DLT applications in a highly regulated financial industry, central bank digital currencies, tokenised assets and stablecoins largely present a big potential for wider adoption. Especially, CBDC-based cross-border payments and tokenised assets appear of significant interest amongst global market infrastructure institutions and international regulatory standards-setting bodies. 

In the recent period, the Bank of International Settlement Innovation Hub, in collaboration with central banks, has tested tokenisation for asset settlement and cross‑border payments. Meridian Securities explored synchronisation between RTGS and tokenised securities settlements; Meridian FX explored synchronised settlement of foreign exchange transactions. The European Central Bank’s extensive DLT pilots tested wholesale securities settlement in central bank money on distributed ledgers and their interoperability.

Regulatory framework
The EU has taken a lead by enacting a comprehensive Markets in Crypto-Assets regulation, while the US has enacted the GENIUS Act, while the Digital Asset Market Clarity Act is under legislative process. The UK, Singapore, Hong Kong, and Switzerland have enacted frameworks, while China restricts crypto trading and issuance, stablecoins and tokenisation and pursues CBDC.

While India is yet to enact a comprehensive crypto law, Virtual Digital Assets are subject to the taxation and PMLA rules. The Securities Markets Code bill proposes inter-regulatory coordination with a sketchy provision, allowing SEBI, under other laws or directives by other regulatory authority, to specify conditions and procedures for issuance and holding  of ‘other regulated instruments’ through depositories.

DLT experimentation in Indian financial sector
India’s financial ecosystem shows few mainstream DLT applications. Receivables Exchange of India’s Trade Receivables Discounting System (2017) uses blockchain smart contracts to boost MSMEs’ working capital through invoice discounting. In 2022, SEBI and depositories introduced a blockchain-based Security and Covenant Monitoring System to track security creation, asset cover, and covenant compliance for non-convertible securities throughout their lifecycle.

In November 2022, RBI piloted India’s wholesale CBDC (e₹-W) for settlement of inter-bank government securities transactions, later expanding to call money and tokenised issuance and settlement of certificate of deposits. It enables central bank money settlement, improving inter‑bank market efficiency, reducing costs, removing collateral needs, and harnessing programmability and smart contracts.

Harnessing Innovation
Shift to Central Bank Money settlement model: In the securities market, clearing corporations (CCPs) like NCL and ICCL process settlement of funds through empaneled commercial banks acting as clearing banks. The commercial bank money settlement model was adopted almost three decades ago to expeditiously enable electronic fund settlement at a time when India’s electronic payment infrastructure was underdeveloped and not ready for CeBM.

CCPs face heightened credit, liquidity and concentration risks as a few large clearing banks handle cash flows and collateral, besides processing inefficiencies. Since these banks also provide safekeeping and custodial services to multiple CCPs and intermediaries, the concentration and interdependencies pose systemic risks. Any operational, liquidity, or financial disruption at these banks could trigger market‑wide instability. Apart from the IOSCO Principles for Financial Market Infrastructures stipulation on CeBM, recommended actions from the IMF’s 2013 India - Financial Sector Assessment Report, advising replacement of commercial bank money model with CeBM, remain unimplemented. Transitioning securities market fund settlements to RBI’s wholesale CBDC would mitigate unaddressed systemic risks while aligning with global standards.

International settlement of Indian G-Secs through ICSDs like Euroclear is a long-discussed initiative to attract foreign investment and enhance liquidity. Despite inclusion of G-Secs in some global bond indices, operational complexities of onshore settlement deter investors, limiting expansion of the global investor base in Indian debt. RBI can explore multi-currency CBDC payments with other central banks to enable cross-border settlement of Indian debt using e₹‑W. It will ease the operational burden of clearing and settlement of investments made by foreign institutional investors. Likewise, fine-tuned capital control norms allowing cross-currency trading and settlement between GIFT platforms and mainland exchanges, anchored on e₹‑W, would significantly advance ₹ internationalisation.

Much of the operational platforms of MIIs was built during the automation wave of the late 1990s and early 2000s. Except for the newer payment infrastructure of the NPCI and modernised platforms of exchanges like NSE, BSE and MCX, the bulk of operators remain under the burden of legacy systems. These include the Public Debt Office and the Clearing Corporation of India in wholesale markets regulated by RBI, as well as depositories like NSDL and CDSL, and CCPs like NSE Clearing and ICCL under SEBI. Despite capacity scaling and upgrades, nearly 3-decade-old IT systems remain fragile, struggling to adapt to frequent business and regulatory changes or rising processing demands. To mitigate their vulnerability to technical glitches and disruption to critical services in an interconnected financial market system, tokenisation-based platform innovation can significantly bolster the operational resilience.

The rapid growth of private asset markets—spanning equity, credit, real estate, infrastructure, venture capital and alternatives—makes them prime candidates for tokenisation. Given their complex interlinkages to financial markets across buyouts, acquisitions, co-investments, leveraged loans, IPOs, and secondary market transactions, a DLT-based integrated platform can boost standardisation, liquidity and processing efficiency.

Way Ahead
A tokenisation platform construct requires fine blueprinting, trials, and evaluation of market structures, operating models, and recalibrated roles of market communities and regulators. It must determine whether tokenised assets operate on exclusive market platforms or co-exist with traditional assets on existing ones.

Besides inter-regulatory coordination across the innovation lifecycle, the industry progress critically depends on fulfilling foundational requisites for adoption:

·         Legal framework: ensuring recognition of tokenised assets, investors’ rights to underlying assets, issuance, trading, settlement, and custody.

·         Operating model: Market structure, platform models (books and records, digital twin, or digital native), clearing optionality, atomic settlement, central bank money settlement through CBDC.

·         Interoperable platforms: Tokenised assets be transferred across different DLT platforms using compatible data structures, messaging standards and smart contract standards.