TheBankforInternationalSettlements(BIS)hasissuedacautionaryreportastraditionalfinancialinstitutionsacceleratetheirexplorationoftokenization,raisingconcernsovergovernance,legalframeworks,andfinancialstability.
Tokenization,whichconvertsreal-worldassets(RWA)likepropertyandsecuritiesintodigitaltokens,hasdrawnattentionforitsabilitytostreamlinetransactionsandreducecosts.Mechanismslikedelivery-versus-payment(DvP)andpayment-versus-payment(PvP)couldhelpmitigaterisksinfinancialmarkets.
AccordingtotheBIS:
“Tokenizationcouldreshapemarketstructuresbycuttingtransactioncostsandimprovingsettlementprocesses.”
However,theBISreport,publishedonOct.21,stressedthatwhilethebenefitsareclear,theriskscannotbeignored.
Regulatoryuncertainty
Despitethesepromisingbenefits,theBISreportemphasizedthattokenizedassetsfacesignificantlegalandregulatoryuncertainties.Onekeyconcerniswhetherexistinglawsextendtotokenizedversionsoffinancialproducts.
Forexample,intheUS,traditionalrepurchaseagreements(repos)areshieldedbyautomaticbankruptcyprotections—yetit’suncleariftokenizedreposwouldreceivethesamelegaltreatment.
Thereportalsoraisedconcernsabouthowtokenizationcoulddisrupttherolesofcentralbanksinpayments,monetarypolicy,andfinancialoversight.
TheBISstressedthatpolicymakersneedtoassesspotentialtrade-offsbetweendifferenttypesofsettlementassetsandensureproperregulationofprivatesectorinitiativestomaintainstability.
RWATokenizationgrowth
Despitetherisks,financialinstitutionslikeBarclays,Citi,andHSBCaremovingaheadwithtokenizationprojects.TrialssuchastheUK’sRegulatedLiabilityNetwork(RLN)arealreadyexploringthefeasibilityoftokenizeddepositsandprogrammablepayments.
Thesectorfortokenizedreal-worldassets(RWAs)isprojectedtogrowdramaticallyin2024andbeyond.TrenFinanceestimatesthemarketcouldswelltoanywherefrom$4trillionto$30trillionbythedecade’send.
Evenamedianestimateof$10trillionwouldrepresentamassivejumpfromthecurrent$185billion,whichincludesstablecoins.
Asthepushfortokenizationgainsmomentum,theBISreportservesasatimelyreminderthatwhilethetechnologyholdsgreatpromise,itcomeswithcoststhatrequirecarefulregulatoryoversight.
Thereportstated:
“Efficiencygainswillnotcomewithoutsignificantinvestmentandcoordination.”
Withtokenizationpoisedtoreshapefinance,collaborationbetweenthepublicandprivatesectorswillbeessentialinmitigatingrisksandunlockingitsfullpotential.
cryptoslate.com