The Financial Stability Board (FSB) and the Bank for International Settlements (BIS) have recently raised concerns about the risks associated with tokenization in the financial system. Tokenization involves the digitization of real-world assets, often using distributed ledger technology like blockchain.
According to the FSB, there are three main vulnerabilities when it comes to tokenization: the underlying reference asset that is tokenized, the participants in projects using distributed ledger technology, and the potential conflicts between new technology and existing legacy systems. The FSB chair, Klaas Knot, highlighted that if tokenization scales up significantly and is used to create complex and opaque products that trade automatically, it could have implications for financial stability.
The FSB also emphasized the importance of oversight, regulation, supervision, and enforcement to address these vulnerabilities. They released an update on their crypto roadmap, noting that while most countries have implemented measures for the sector, inconsistencies still exist.
Countries worldwide have been exploring tokenization, with the FSB making it a priority for monitoring earlier this year. Additionally, over 40 firms joined the BIS in September to explore tokenization for cross-border payments.
The BIS, as the global standard-setter for banking regulation, issued a report highlighting the potential benefits of tokenization, such as reducing frictions in asset trading. However, the report also pointed out that existing risks like credit and liquidity risks, as well as cyber risks, could still apply to tokenization.
The BIS report mentioned that these risks could manifest differently due to changes in market structure caused by token arrangements. It also warned about the emergence of conflicts of interest and stressed the importance of sound governance in tokenization processes. Overall, both the FSB and BIS are calling for more regulation and oversight in the rapidly evolving field of tokenization to ensure financial stability and mitigate potential risks in the financial system.
