A token-based operating model unifying traditional and token-based operations for security services

Completed on 28 March 2024 and published almost three months later in this subscription academic journal, the 16-page paper, entitled ‘‘A token-based operating model unifying traditional and token-based operations for security services’ explains how asset tokenisation, should it have the expected impact on the future of financial services, can be accommodated within the business model of a traditional custodian.

It examines the necessity for custodians to enter tokenised markets and proposes a future operating model for traditional custodians. Teis and Clarke explore the advantages from the traditional and digital models, such as leveraging regulatory expertise and existing customer bases from the traditional space alongside the efficiencies from digital technologies, as well as challenges, including the adoption of new technology stacks involved in such a model.

Their proposed operating model utilises a blockchain infrastructure that relies on the use of tokens that spans both traditional and digital assets to create an automated platform. This platform can include the automation of credit risk and liquidity across multi-asset classes and multi-jurisdictional operations.

“Traditional custodians will need to adjust their target operating model”
Stefan Teis, Head of DLT and Digital Asset Services and Mike Clarke Global Head of Product Management Securities Services at Deutsche Bank

The model introduces two types of tokens:

• Value tokens (the fully digital or tokenised assets as well as tokenised money); and
• Proxy tokens (among others, representing traditional assets).

While value tokens carry value and represent tokenised assets, proxy tokens do not carry value. These proxy tokens are an internal representation of traditional assets that can facilitate managing the intra-day liquidity and extended credit lines offered to customers.

Within the proposed operating model, all transaction instructions, whether in the traditional or tokenised realm, are streamlined through a unified ‘instruction worklist’. The authors conclude the paper with a proposed schematic architecture for the technical implementation of the operating model.

Commenting on why they wrote the paper, Teis and Clarke say that, assuming tokenisation will be important for future financial markets, “traditional custodians will need to adjust their target operating model (TOM) accordingly”. They continue, “As the transition into the ‘tokenised world’ will not take place overnight, one needs to plan for a seamless transition in the operating model, specifically:

• Ensuring a ‘load shift’ between traditional TOM and digital TOM over time and varying across different markets and geographies
• This goes, in particular, for the ‘P’ in delivery versus payment (DvP) – where one needs to consider all permutations. In particular: tokenised money payment for traditional transactions, and fiat payments for tokenised securities transactions.”

Commenting on the article, publishers Henry Stewart Publications said they are “delighted to publish Stefan Teis and Mike Clarke’s excellent article, proposing a token-based operating model for security services, in Journal of Securities Operations & Custody”. They continue, “Asset tokenisation will have a profound impact on future financial services and briefing securities professionals and researchers on major new developments is a critical part of the JSOC’s remit. Stefan and Mike’s article, which passed independent peer review, sets out a detailed operating model for token-based securities and provides essential reading for custody operations.”

A link to the abstract of ‘A token-based operating model unifying traditional and token-based operations for security services’ in the Journal of Securities Operations & Custody Volume 16 Number 3 is available below along with information on how to access the complete article (available to journal subscribers).

Volume 16, 2023-2024 | Henry Stewart Publications