The ‘Token’ theory of Banking/ Financial Services Evolution

….We live among its people now, hiding in plain sight, but watching over them in secret, waiting, protecting.

-?????Optimus Prime, Transformers

Evolution of banking, it now appears, could be understood from the evolution of ‘Tokens’. Over a period of time, the usage of the term and aligned capabilities, chronicles the reinvention of banking and therefore, possibly, promises to provide a preview of what might be.

Here are broad strokes of ‘token’ evolution:

Token 1.0 - The humble token, often on a paper, was a queuing and service sequence enabler, typically in a branch context. Additionally, a sturdier, numbered token, often a piece of metal coin (or) triangle, was a control mechanism, used to enable slightly more riskier transactions, such as, cash withdrawals.

Token 2.0 - As digitization took shape, more ‘token’ types came about.

§ Some banks issued challenge-response ‘tokens’ to enable access to online banking channels. OTP is now an almost universal token model of authentication.

§ More significantly, card payments crossed over to the digital channels via ‘tokenization’. The funding PAN was replaced with a random ‘token’ to minimize risk of compromising card data and driving compliance to PCI-DSS.

§ As mobile payment adoption rose, tokens evolved to identify the device. By a provisioning process, a payment card, is loaded into a digital wallet. Tokens, from then on, took on ‘state’ and hence a lifecycle.

Token 3.0 - As the high walls of banking were/are being pulled down, via open banking regulation, the humble ‘token’ took on a different role. Tokens now underpin ‘consent’ that enables secure sharing of information (access tokens) and also enable ‘initiation’ of payments (transfer tokens).

Token 4.0 - As open finance takes shape, often leveraging distributed ledger technology, token is taking on a much more diverse role. It could now represent assets, loans, monetization rights, swaps, access etc.

§?Discussions on digital currencies has triggered an interesting equation: Account based vs Token based, drawing a distinction between, verification of the payer or the object, respectively.

§?Among other POCs, in the recently completed CBDC project, ‘Jura’, tokenized asset and foreign exchange trades were settled. Also in the project, a Digital Asset Registry (DAR), a DLT based registry for ‘tokenized’ commercial papers. ?

As stated above, ‘tokens’ have been ubiquitous. They have been with us, all along. Their nature, form and function have constantly evolved, always enabling the next level.

More power to ‘Tokens’…..onwards !