Tokenisation Blurs Lines, Breaks Silos, Causes Headaches for Regulators, HSBC says

Tokenisation is shifting the roles of traditional financial market players as long-held distinctions and definitions began to blur as a result of blockchain technology being rolled out across Wall Street, causing a potential headache for regulators, HSBC says.

Daragh Maher, head of digital assets research, senior FX strategist at HSBC, argues that tokenised money market funds have characteristics that make them similar to cash due to their operational characteristics of 24/7 transferability and near- instant settlement. Tokenised MMFs have primarily emerged in the US but Amundi’s debut late last year suggests growing momentum in the EU as well. 

As tokenised MMFs act as collateral and come in a divisible and transferable format, the distinction between an interest-bearing deposit and a tokenised fund becomes less about function and more about regulatory form for institutional users or corporate treasurers, Maher argues.

“For investors, tokenisation is not simply a capital markets technology upgrade. It is a structural force reshaping the financial system’s taxonomy. As instruments become more cash-like, institutions more interchangeable, and balance sheets more fluid, the traditional distinctions… are likely to matter less,” he says. “The regulatory response will determine how far and fast this convergence proceeds, but the direction of travel is increasingly clear,”

Corporate treasuries are another example of where lines could become blurred. Some of the large, cash-rich corporates  already manage substantial portfolios of liquid securities, which tokenisation could unlock and turn into assets that can be deployed for payments, collateral or financing, without the need for traditional banking channels. This turns corporate treasuries into active financial intermediaries rather than passive allocators of surplus liquidity, Maher argues.

The lines between banks’ balance sheets and asset manager portfolios could also become less defined if tokenisation turns credit exposures, such as loans and trade receivables, into a model that allows for distribution. 

Bank balance sheets become more fluid, with assets packaged, fractionalised and transferred to external investors. Banks begin to look less like deposit-funded lenders and more like asset managers overseeing pools of credit risk. Collateral, money and investment instruments are also in sight, as all can increasingly function as programmable collateral, allowing these assets to mirror the roles in repo and money markets.

For regulators, this creates new issues. “The BIS perspective is to expand prudential regulations to any entity conducting bank-like activities. But this risks stifling innovation and forcing a fundamentally different business model to conform to a regulatory architecture designed for siloed activities and responsibilities. We suspect regulation will move from an entity-based format to an activity-based approach, but this is perhaps easier to contemplate than deliver in practice,” Maher concludes.