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(Bloomberg Opinion) -- Earlier this year, Singapore jailed three Chinese nationals for puttingstrong glue on their palmsto steal casino chips from other gamblers. Substitute chips with digital tokens,and glue with deceptive computer code, and you could be talking abouttheft of bonds, equities, mutual funds or any other ownership interest that can have a parallel life on the blockchain.

Turning financial securities into cryptographic representations that can be bought and sold in tiny fractions of what is possible today opens up a new avenuefor themasses to accumulate wealth. Using blockchains to democratize finance is an idea that Asia, in particular, has fallen in love with.

Last week, the Singapore central bank announcedfive new pilots in partnership with Ant Group Co., Franklin Templeton, JPMorgan Chase & Co. and other private-sector playersto explore different aspects of tokenization. Hong Kongs Securities and Futures Commissionissued a circularthis month for those planning to bring tokenized digital assets tothe market.

For both largeinstitutions and financial hubs like Hong Kong and Singapore, it makes sense to build the shiny newrails on which much of tomorrows money may move. Transactions will be a lot faster,with fewer intermediaries and at a lower cost. Citigroup Inc. has estimated issuance of tokenized securities at between$4 trillion to $5 trillionby 2030. But enforceability of property rights in a public blockchain a decentralized network where nobody knows or trusts anyone may emerge as a thorny issue.

The conventional way of recording asset ownership goes back at least 700 years. In 1494, Luca Pacioli wrote histreatise on double-entry bookkeeping, a system that he claimed had by then been in vogue in Venice for a couple of centuries. The technique relies on crediting one account to reflectwhatis acquired, such as real estate, and debiting another account, like bank deposits, to showhowtheincrease came about.

The newly created assets and liabilities of investors and issuers get translated into claims of their financial institutions on one another. If only a single currency is involved, the IOUs aresettled with absolute finality on the balance sheet of the national monetary authoritywhere these banks have accounts.

Digital tokens will shake up this entire edifice. Stablecoins, or crypto assets that targeta fixed monetary value, have been described by USSecurities and Exchange Commission Chair Gary Gensler asthe poker chip in thecasino.Tokenized securities will be somewhat different.Their values will fluctuate based on demand and supply, and they will come with built-in softwarethat directs the issuer to pay interest or dividends to investors.

But just like chips represent cash, tokenswill stand in for securities, delinked from accounts.Value will shift from player to player, withdistributed ledger technology, or DLT,keeping track of fundmovement. But what is the legal finality of these transactions? If a dispute crops up, will blockchains be recognized by the courts as final books of records, an ownership ledger? One cant be very sure.

Asset manager Schroders Plc and globalfunds networkCalastone are running a pilot under the Monetary Authority of SingaporesProject Guardianthat will seek toapply the security attributes inherent in DLT to evolve traditional forms of bookkeeping and demonstrate proof of ownership through tokens.

Authorities wont be in a hurry totrust a layer of technology as the finalbasis for ownership, not when a ransomware attack can force Industrial & Commercial Bank of China Ltd., the worlds largest bank, to settle trades with counterparties viamessengers carrying USB sticks.

Hong Kongs circular is clear: The regulator would treat the token asonly a wrapperaround something that is valuable. The usual rules will apply. Intermediaries will conduct due diligence on issuers of tokenized securities and their technology vendors, make disclosures to the public, and take additional precautions before offering tokens on public networks that dont have a central authority and where anyone can participate.

This is dangerous territory.According to one industry researcher, fraudsters deployedmore than 200,000 scam tokensbetween September 2020 and Novemberlast year. Why areinstitutions so keen, then, to back an idea that takes them away from the time-testedsystem of recording property rights? Especially when it risks exposing them (and their clients) to new problems such as fraudulent computer code embedded in self-executing smart contracts? A possibleanswer: Satoshi Nakamoto.

The pseudonymous creatorof Bitcoin may have failed in inventinga better form of money, but a payment system based on cryptographic proof,the technology he sketched out in his2008 paper, is ready. The public sector, which is wary of cryptocurrencies, wants to be in controlof this new architecturewith central bank digital currencies, or CBDCs. That could potentially erodethe importanceof private-sector intermediaries, unless banks and asset managerstake the lead and insert themselves into the equation.

The custodial institutions best bet is to hope that courtswill be reluctant to come up with aLaw of The Horse.That dictum was made famous by a USjudge in the 1990s who wanted to stressthe point that every innovation (cyberspace, back then) does not require a new set of rules. Tort laws are perfectly capableof taking care of people getting kicked by someone elses horse; there are other legal codesto deal with prize money fromracing or the standard of veterinarian care.

Ditto for tokens. When disputes ariseas they inevitably will courts and regulators would throw away the cryptography, and go back to the underlying securities. Their ownership rights would belegally honored not much differently than was the custom 700 years ago in Venice. The same institutions that Nakamoto was going to make extinct with his push for decentralization of finance would remain in charge, albeit they would be using the new technology to spread the reach of their products.

Still, its one thing for institutions to exchange valueamong themselves in private digital networks supervised by acentral authority, but intermediaries selling tokenized stocks, bonds or fundsto the public in an open marketplacewhere anyone can participate anonymously? That could get messy. Even if you catch swindlers with chips glued to their hands, it may be hard to return stolen property to its rightful owners if it has changed hands at five other tables oroutside the casino, for that matter. Regulators need to temper their optimism, and make haste slowly.

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To contact the author of this story:Andy Mukherjeeat[emailprotected]

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Tokenize Stocks, Bonds, Funds, But Proceed With Care - Wealth Management