News Report:
The Bank for International Settlements (BIS) today (Monday) released a report outlining the potential impact of tokenization on central banks. The report, titled “Tokenization in the Context of Money and Other Assets: Concepts and Implications for Central Banks,” was prepared for the G20 and developed under the auspices of the BIS Committee on Payments and Market Infrastructures (CPMI).
Tokenization: Benefits and Risks
Tokenization refers to the digital representation of traditional assets on programmable platforms. The report examines the global challenges in regulated payment systems and the potential advantages of tokenization in reducing frictions in financial markets. However, the report emphasizes that risks must also be addressed.
It suggests that tokenization could alter the pre- and post-trade functionalities of currencies and other assets. Governance, legal frameworks, credit, liquidity, regulatory, and operational risks need to be carefully addressed.
“Tokenization has enormous potential to enhance the safety and efficiency of the financial system,” commented Agustín Carstens, General Manager of BIS. “Central banks and the private sector must continue to explore new technologies and develop solutions that are fit for the future financial system. However, tokenization also brings economic, legal, and technological challenges that must be addressed to realize its potential.”
While tokenization can bring many benefits to the financial system and the wider economy, costs and risks also need to be considered. Learn more in the report.
@g20 Organization
Bank for International Settlements and its Committee on Payments and Market Infrastructures
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– Bank for International Settlements (@BIS_org) October 21, 2024
Central Banks’ Response to Tokenization Challenges
The report warns that the risks associated with tokenization may differ from those faced by traditional market infrastructures. It highlights four key considerations for central banks across countries. Firstly, central banks must respond to ongoing tokenization initiatives by the private sector, particularly in terms of market fragmentation. Secondly, they need to assess different types of assets involved in token arrangements, settlement, and its implications. Thirdly, identifying and regulating tokenization arrangements that may require supervision is crucial. Lastly, central banks should evaluate how token arrangements impact monetary policy, especially concerning the structure of regulated markets and demand for various forms of currency.
Fabio Panetta, Governor of the Bank of Italy and Chair of CPMI, commented, “Like existing payment, clearing, and settlement systems, token arrangements’ potential to enhance the safety and efficiency of the financial system will require sound governance and risk management. The known risks of existing systems apply, but these risks may materialize in different ways due to the impact of token arrangements on market structure.”