By Ashish Singhal, Co-founder and CEO, CoinSwitch
India spent the last 10 years digitising identity, payments and financial records. The next 10 years could be about digitising ownership
Over the last 10 years, India has built one of the most sophisticated digital public infrastructure ecosystems in the world. Aadhaar brought digital identity to the population at large. UPI made instant money transfer an everyday reality. DigiLocker provided a trusted digital record. Demat accounts have changed the way millions of Indians own and transfer financial assets.
Each of those developments addressed a different problem, but collectively they achieved something far bigger. They created trust in digital systems. Today the opening of an investment account, identity verification, the transfer of funds and the holding of securities electronically are all part of the normal financial experience for most of us. That degree of adoption is the rarest of things and provides a very interesting starting point for the next phase of financial innovation.
That trust may well be India's biggest asset in the next phase of financial innovation. Much of the world is still in the very early stages of building the infrastructure needed for tokenisation. India has already spent years in the process of laying the foundations. The question is no longer one of whether the infrastructure is there. The question is whether we are ready to use it in new ways.
Why Tokenisation has become a serious conversation
The timing is no accident. Tokenisation is no longer a niche blockchain play. Governments are looking at regulatory regimes, global financial institutions are running pilot programmes on tokenised deposits and securities, and asset managers are looking at how digital infrastructure can enhance settlement, liquidity and market access. The debate has moved on from 'is it possible?' to 'where does it actually create value?'.
India comes into that discussion from a very different starting point. Rather than being in the position of many other countries who are building out their digital identity, payments and electronic ownership systems in parallel with tokenisation, India has already done much of that. That changes the nature of the opportunity completely. You're no longer in the business of building the digital rails. You're in the business of working out which markets are going to be the best beneficiaries of those rails.
Why Tokenisation matters?
Every financial transaction is governed by three basic questions: who is the party to the transaction? Who owns the asset? And how does the ownership of that asset change as a result of the transaction?
Today those functions are split across a number of institutions and systems. The bank does the identity verification, the registrar holds the ownership records, and the clearing corporation does the settlement. That structure has worked for decades in the markets, but it does so through a number of layers of verification, reconciliation and settlement before an asset actually changes hands.
Tokenisation brings a whole new model to the table by creating a digital representation of an asset whose ownership can be recorded, transferred and verified on a shared infrastructure. For the investor, this can mean faster settlement, clearer audit trails and improved operational efficiency. For the issuer, it opens up a whole range of new possibilities in terms of distribution, fractional ownership and lifecycle management. The potential is therefore far greater than simply digitising an asset and improving the infrastructure around the ownership of that asset.
Let's continue with the UPI example we discussed earlier. Digital payments didn't change the value of money; they simply changed the way money moved around the economy. Tokenisation has the potential to bring about a similar shift in the way we think about ownership. The asset itself is the same regardless of whether it's a government bond, an invoice, a commercial property or a quantity of gold. What changes is the efficiency with which that ownership can be transferred.
This is particularly pertinent to India given that many of the markets which could be served by tokenisation are already in place. The opportunity lies in improving the way those markets currently work by making ownership easier to access, transfer and verify.
Where Tokenisation is likely to create value?
The opportunity isn't in any one asset class. The common denominator across government securities, invoices, gold, commercial property and carbon credits is that they all require some form of ownership establishment, transfer of rights and settlement. They're all infrastructure problems rather than sector problems, and that's exactly why tokenisation has such a broad range of applications.
One of India's great strengths is that tokenisation doesn't have to go out and look for use cases, as so many of the country's largest asset classes already have deep levels of participation, are well regulated and are very active economically.
Perhaps the most exciting aspect of tokenisation is its ability to increase participation. Over the past decade, digital investing has opened up the capital markets to millions of Indians.
Govs are one of the strongest cases as they're so reliant on trusted ownership records and efficient settlement. The impact of even a small improvement in the market infrastructure in that space would be enormous given the sheer size of the markets.
MSME financing is another very good opportunity. The businesses themselves are constantly sitting on invoices and receivables which have real economic value. The problem is that in order to get the money from those invoices and receivables, you have to go through a long verification and processing cycle. A digital version of those receivables could go a long way to improving liquidity and getting the capital moving.
India's relationship with gold provides another interesting use case. Physical ownership remains the norm, but investors have increasingly turned to financial instruments in the form of Sovereign Gold Bonds and Gold ETFs. Tokenised ownership could broaden the range of investment vehicles available by making transferability and ownership records much simpler. It doesn't alter the asset in any way; it simply changes the way the ownership of that asset can be recorded, transferred and potentially accessed by a much wider group of investors.
Real estate also has huge potential. Property in general has always been a capital-intensive proposition which has in the past limited the number of people who have been able to get involved. Fractional ownership via tokenised structures could in time open the door to a much wider range of people whilst still preserving the value of the underlying asset.
Other areas too (carbon credits, renewable energy assets, supply chain finance) are now starting to show the benefits of programmable ownership and improved verification in terms of market efficiency. All of these are well-established markets. Tokenisation offers a more efficient way of running them.
Why India is closer than most countries
India's biggest advantage in the end is not really the technology. The sheer scale of the Indian population who already have a digital identity, who already move money instantly, who already invest through digital platforms and who already have their financial assets in digital form is enormous. Every wave of financial innovation that's come through in India has been about reducing friction rather than adding complexity. Tokenisation is no different.
Lots of countries are in the process of experimenting with tokenised markets whilst at the same time building the underpinning digital identity systems, the payment infrastructure and the electronic ownership frameworks. India has spent years building those foundations. The debate can now turn to where tokenisation is going to create the most economic value and how it can be plugged into markets that are already operating at scale. Ownership is the same opportunity in that you can take the existing infrastructure and use it to enable much greater participation, greater efficiency and new forms of investment across the financial markets.
The next stage will ultimately be a function of sensible regulation, prudent experimentation and cooperation between regulators, the financial institutions and the tech companies. Those discussions are already underway.
But the bigger opportunity is not really about any one technology. The real question is not whether tokenisation is technically feasible. The question is whether India will actually go on to use the digital infrastructure it has already put in place to build more efficient, more accessible and more inclusive capital markets. If the last decade was all about digitising the transaction, the next decade may well be about digitising ownership.
(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)
