The digital assets of the future: tokenised, programmable and more secure

At this point in 2020, paying with a bank card may seem like a thing of the last century. And indeed it is - their origins date back to the 1910s. Because of the pandemic, the shift towards a cashless society is accelerating, but there are other ways of digitising monetary value that were also created in the twentieth century, which are now looking to modernise.

A digital asset is any kind of resource that either represents a digitised real asset (a financial value, company shares or property) or has been created digitally and has its own value (for example, cryptocurrencies or web pages). "The digital representation of assets has existed since the last century and works very well to exchange value reliably and efficiently", indicates Francisco Maroto, Blockchain Discipline Leader at BBVA.

Nevertheless, everything can be improved, and this is what could be done with blockchain technology, a way of structuring data that increases security, ensures traceability and decentralises the control of shares. In particular, in the case of digital assets, a lot of work is going into tokenisation, a process within blockchain that allows an asset to be replaced by a code.

"By tokenising an asset, we represent it as digits and letters, and we obtain a unique cryptographic representation - the asset token", explains Carlos Kuchkovsky, Chief Technology and R&D Officer at BBVA. Also, by digitising it, "you can give that asset some internal logic, making it subject to certain conditions and know how to interact and receive information".

Tokenisation is a new way of doing things. "With digital assets in use, it is a central entity that brings confidence. In the case of tokenised assets this could be done in a distributed or decentralized way, which is more efficient and faster, improving the user experience", Maroto summarises.

Technology in the conditional tense

We have to talk about the tokenisation of digital assets in conditional terms. As Maroto points out, this is a technology where progress is being made rapidly, but "with caution", and the state of affairs depends very much on each country and how they regulate assets.

"In England tokenised bonds have been issued in the Regulatory Sandbox, a secure environment where such tests can be done even without regulations having been adapted; DBS Bank in Singapore is developing an exchange for tokenised digital assets; and in the US there are fintechs like Securitize that are issuing these kinds of assets", details the expert.

"The technology is there. Once there are regulations in place it will be much easier to move forward"

The Asian giant China Construction Bank had announced that it was issuing an offshore bond in the form of blockchain tokens valued at US $3 billion, which ultimately has been postponed. For its part, in September the European Commission presented a first draft of regulations on Markets in Crypto-assets (MiCA), defining different types of assets, providers and possible services in this market.

"The technology is there: we need to create the market and ecosystems, generate supply and demand, and generalise their use. Once there are regulations in place it will be much easier to move forward", adds Maroto. The expert also reminds us of the security that this will give users: "Regulations are a good thing for consumer protection, they can trust that they're not going to be deceived and can have the confidence to work with tokenised assets".

Financing, investment and sustainability

If we continue in the conditional, but look at the future potential of this technology, there's a wide range of possibilities. For SMEs and startups, for example, tokenised assets could be a major trump card for getting financing. "Issuing bonds via tokens for funding would give access to simpler, more efficient channels with global access. You could list that token on one or several exchanges in Spain, Germany, the USA and Asian countries, and by doing so have immediate access to new alternative financing avenues and many more investors", says Maroto.

If we're coming at this from the other side of the playing field and we want to invest, Kuchkovsky notes that the biggest revolution is that "we'll be able to fully orient our investment to our values and objectives. For example, if we want to invest in assets that are not weapons-related, that help the local community or that meet decarbonisation goals". This is something that can already be done, but "with digital assets it will mean much more transparency and efficiency - you know for sure that the money you invest will not go towards anything that doesn't meet the conditions you have specified".

"It would make a lot of sense to use tokenised digital assets in sustainability-related markets"

With a focus on decarbonisation, Maroto indicates that "it would make a lot of sense to used tokenised digital assets in sustainability-related markets, such as carbon credits and assets to offset environmental footprints".

Moreover, according to Alexis Hamel, Managing Director of Solaris Digital Assets of the startup Solarisbank, digital assets in decentralised networks can change ownership without the need for intermediaries, making transactions faster, cheaper and more transparent.

This company, of which BBVA is an investment partner, offers an API to safeguard digital assets such as Bitcoin, Ethereum and ERC-20 Tokens, so that customers can store them securely and at the same time have guaranteed access to their assets in blockchain. To do this, Hamel says that they use "a decentralised security model that allows transactions to be signed securely in a distributed and mathematically tested manner".

Tokenised, programmable money

If we talk about money itself, as we traditionally understand it, then tokenisation and digitisation could make it possible to make a leap into the future with programmable money. "It would be possible to put conditions on your payments. For example, in a vending machine, you could assign a euro some internal logic so that it would only allow the purchase of products without alcohol or without sugar", explains Kuchkovsky.

 "Tokenised money could help to put a stop to problems like money laundering and the financing of terrorism"

"Tokenised money could help to improve the fight against money laundering and the financing of terrorism", says Kuchkovsky. The balance between utility, ethics and privacy has to be taken into account: "We have to ensure that anonymity is still preserved, no one needs to know what you spend your money on. To do this there are techniques like the zero-knowledge proof, which makes it possible to verify that two properly identified people have sent something in a non-fraudulent manner, but without revealing who or for what".

Central banks are researching how to manage it and the possibility of issuing digital money. "The European Central Bank has just sent out a questionnaire to the financial community on the possibility of issuing a digital euro. At BBVA we're following this closely, and with Iberpay, the Spanish Payment Service Company, we're working on a project about tokenised digital money using blockchain", says Maroto.

Although there are still challenges ahead, the tokenisation of digital assets promises to take off as soon as regulation allows it. "The tokenisation of traditional assets into digital assets has the potential to completely revolutionise how we exchange value", according to Hamel from Solarisbank. At BBVA, Kuchkovsky states: "We're ready. Now it's a question of waiting for the maturity curve and continuing to build knowledge and skills, both internally and alongside the external ecosystem".