The role of tokenisation in cross-border transactions

Digital currencies promise to transform large sections of the financial services world. However, the potential the technology brings is yet to be fully realised — particularly when it comes to improving the cross-border investment experience.

"The group is investigating ways to use tokenised forms of money to help Australia-based businesses invest in Hong Kong-based funds, hoping to apply the lessons learned across different markets."

At ANZ, we believe in the transformative benefits of digital assets. Over the past three years, we’ve been exploring how tokenisation -  the process of representing an asset, or the ownership rights of an asset, as a digital token on blockchain or other decentralised network - can improve the way we meet our customers’ needs as they move goods and capital across the Asia Pacific region. In particular, we’re exploring developments which can help our customers invest in foreign markets in a way that’s safer, faster, and cheaper.

As part of that test-and-learn process, in 2024 ANZ linked with our partner Visa in the Hong Kong Monetary Authority (HKMA)’s Phase 2 e-HKD Pilot Programme, and joined by our clients China AMC Hong Kong and Fidelity International.

The group is investigating ways to use tokenised forms of money to help Australia-based businesses invest in Hong Kong-based funds, hoping to apply the lessons learned across different markets. As a bank, we see it as an opportunity to improve the way different systems, or financial market infrastructures, work together — known broadly as ‘interoperability’ — and to foster collaboration across the digital-asset space. These tests will involve various forms of digitised money, including tokenised deposits, Hong Kong’s central bank digital currency e-HKD, and, excitingly, ANZ’s very own stablecoin, A$DC.

The work we’ve done so far has been fascinating, and we’re eager to share more about the outcomes and benefits – and how that might change the way cross-border transactions work in the future.

Fragmented

Today's tokenised asset markets don't always play well together. In this fragmented environment, different technologies can effectively reach similar outcomes, but these systems are not always designed to effectively communicate with each other. Figuring out ways they can is a key goal of the pilot.

The potential benefits of tokenisation in this space are numerous. Existing methods for investing in funds can be slow, require manual intervention, and often lack transparency. This approach limits transaction efficiency and maintains both counterparty and credit risk. Research from Boston Consulting Group (BCG) in 2024 suggested that tokenising all mutual funds in the world could add around $US100 billion to returns every year, largely attributable to improved operational efficiency. That seems a long way off, but the rewards are clearly there to be taken.

Even in the event of complete asset lifecycle tokenisation, interoperability will remain a challenge. Any cross-border transaction today faces eligibility, privacy, and auditability hurdles. It doesn't have to be this way.

Another benefit is fractionalisation — the splitting up of assets into smaller, virtual parts — allowing for unique, tailored investment strategies. Asset tokenisation can therefore help open these funds up to a wider range of investors than before — from traditional investors like banks and family offices, to ‘new’ investor types like digital-asset banks and crypto platforms.

Through the work we’re doing with our partners we’re hoping to learn more about market demand for tokenised funds, particularly when investing across borders.

Testing

The program will consist of several initiatives that aim to test the benefits of tokenised funds, by simulating the process of foreign exchange and the minting of digital money in a sandbox environment.

In the test, an investor will buy e-HKD through their bank (in this case, ANZ) and then an interest in a Hong Kong-based money market fund using the digital money. This will all happen in near real-time, to explore how the process impacts settlement-related counterparty risk.

Today, foreign exchange and sharemarkets can be vulnerable to counterparty risk, where a failure to deliver owed assets may cause significant financial losses. In the pilot, smart contracts for atomic settlement will be used to facilitate the trade in near-real time, facilitating the simultaneous exchange of tokenised money and assets.

While there are existing systems in place today to mitigate settlement risk, we’re hoping our results will highlight how the use of distributed ledger technology can drive further near-real-time transactions between new forms of digital money and tokenised assets like MMFs.

We’re also hoping to learn if interoperability between public and permissioned blockchain networks can help banks maintain customer privacy while participating in public ecosystems. Both private and public blockchains bring unique benefits and limitations, and interoperability solutions will be critical for optimising compliance as well as improving access to liquidity.

In our pilot, ANZ and Fidelity will test Chainlink’s Cross-Chain Interoperability Protocol (CCIP) to connect an ANZ private blockchain and the public Ethereum network, in a test environment, exploring the challenges and infrastructure needed to connect permissioned and public blockchains in a way that benefits all.

Now and in the future, a set of emerging robust token standards will be important to ensuring interoperability is successful, providing regulatory clarity, and agreed best practices. We’re hoping to use the pilot to learn more about these standards which will help both interoperability and regulatory compliance.

Support

These examples are just a brief glance at the things we’ll be exploring through the program. And it’s not the only industry collaboration we’re involved in as a bank, with ANZ concurrently working on similar digital-asset exploration projects in Australia and Singapore.

As a bank, we know we have the experience to be leaders in this space. A$DC was the first $A-referenced stablecoin issued on a public blockchain by a commercial bank. In 2023, ANZ worked with Grollo Carbon Ventures (GCV) to tokenise nature-based assets. 

With this unique understanding of the space, we’re confident the pilot will demonstrate how ANZ’s existing network, data and technology capabilities can support our multinational and institutional customers to move goods and capital across the region.

Nigel Dobson is Banking Services Portfolio Lead at ANZ

You can find out more about the pilot program in the report “Transforming Global Payments: The Role of Tokenized Money & Funds in Cross-Border Transactions”