- According to a Bank for International Settlements (BIS) research, tokenization has several advantages, such as lower transaction costs and quicker transactions.
- For central banks holding tokenized assets, the main issues are governance, legal, and liquidity risks.
- Tokenized deposits are being tested by major banks in an effort to increase programmability and settlement efficiency.
Tokenization in the Context of Money and Other Assets: Concepts and Implications for Central Banks, a research published on Monday by the Bank for International Settlements (BIS), examines how tokenization can change the financial landscape and affect the function of central banks.
According to the paper, tokenization has attracted the attention of institutional investors due to its potential to provide substantial advantages like lower transaction costs and faster transaction speeds. The international financial organization that guarantees liquidity for central banks worldwide, however, issued a warning that these benefits are not without risks and difficulties.
Dangers to the stability of finances and governance
The paper noted a number of concerns related to tokenization, including operational, credit, liquidity, custody, and possible governance and regulatory framework problems. These issues may present in different ways than those encountered by conventional market infrastructures, thus central banks will need to conduct a comprehensive analysis.
In order to discover, monitor, and evaluate tokenization arrangements that would require effective regulation, supervision, and oversight, central banks must weigh the trade-offs and strike the right balance between various settlement asset types.
The BIS paper emphasized how token arrangements could affect the way monetary policy is implemented, especially in relation to shifts in the composition of regulated markets and the demand for central banks as opposed to other money sources. The way central banks function in the future may be impacted by this changing environment.
Tokenization can increase the security and effectiveness of the financial system, but it also brings with it technological, legal, and economic issues that need to be resolved, according to BIS General Manager Agustín Carstens.
According to the research, the unexpected or ambiguous execution of a law could give rise to legal problems associated with tokenization.
It might occur with regard to token arrangements in situations where it is unclear or uncertain how the current laws apply to the idea of tokens. For instance, repo transactions are automatically shielded against bankruptcy in the United States; tokenized versions of repo transactions could not have the same benefit.
Realizing the benefits of token arrangements would require strong governance and risk management, according to Fabio Panetta, Chair of the Committee on Payments and Market Infrastructures (CPMIA).
Because token arrangements have an impact on market structure, the well-known hazards of current systems may manifest in different ways.
Large financial institutions are testing tokenization
To increase settlement efficiency and make programmable payments possible, more and more international financial institutions are investigating tokenized deposits. The findings of the Regulated Liability Network’s (RLN) experimental phase, which explores the possibilities of tokenized deposits and programmability, were made public by UK Finance in September. Five use cases, ranging from tokenized bond settlements to home sales, were tested throughout this phase.
The study examined important tokenization-related issues, such as prospective revenue streams, related expenses, and advantages provided. The project investigated a number of revenue models and found notable benefits. But according to the paper, in order to achieve commercial success, a wider range of use cases—like methods to diversify transaction types—must be developed beyond those that were first tested.
Barclays, Citi UK, HSBC UK, Lloyds Banking Group, Mastercard, NatWest, Nationwide, Santander UK, Standard Chartered, Virgin Money, and Visa were among the banks that took part in the study.
Disclaimer : This article was created for informational purposes only and should not be taken as investment advice. An asset’s past performance does not predict its future returns. Before making an investment, please conduct your own research, as digital assets like cryptocurrencies are highly risky and volatile financial instruments.
