Report for the G20 on tokenization highlights the opportunities, risks and future considerations for central banks

While tokenization could offer numerous benefits for the financial system and broader economy, costs and risks also need to be considered. New BIS report highlights four key considerations for central banks: private sector initiatives; trade-offs between different types of settlement assets; sound regulation, supervision and oversight for tokenization; and the impact on monetary policy implementation.

Tokenization of money could have implications for the role of central banks in payments, monetary policy and financial stability, according to a new report to the G20 published by the Bank for International Settlements (BIS).

Tokenization in the context of money and other assets: concepts and implications for central banks, which was prepared by the BIS, including the BIS Committee on Payment and Market Infrastructures (CPMI), examined tokenisation – the generation and recording of digital representations of traditional assets on a programmable platform. 

The report also looked at global challenges in the regulated payments sector and focused on the possible benefits of tokenization in addressing existing frictions in financial markets. It considered potential benefits of some of the innovative solutions involving new use cases and functions that are currently being explored around the world. 

It notes that, while the potential benefits of tokenization, such as cheaper and speedier transactions, have attracted interest, the costs and risks need to be considered. 

They may also affect how pre- and post-trade functions are executed for money and other assets. In addition, ensuring appropriate governance and legal frameworks, credit and liquidity risks, as well as custody and operational risks will also require focus. 

The report also highlights that risks may materialise in a different manner to the challenges faced by conventional market infrastructures. Tokenization arrangements provide platform-based intermediation for financial assets that may lead to changes in how financial markets operate and are structured. 

In this context, the report focuses on four key considerations for central banks:

• responding to ongoing private sector tokenization initiatives; for example, whether to foster interoperability in the case of fragmenting markets;
• assessing the trade-offs and the appropriate balance between different types of settlement assets in token arrangements;
• Identifying, monitoring and assessing tokenization arrangements that may need to be subject to sound regulation, supervision, and oversight; and
• assessing the potential impact of token arrangements on monetary policy implementation, for example through changes in the structure of regulated markets or the demand for central bank versus other types of money. 

General Manager of the BIS, Agustín Carstens, says:

Tokenization has significant potential to improve the safety and efficiency of the financial system. Central banks along with the private sector must continue to explore novel technologies and develop solutions that are fit for purpose for the future financial system. However, tokenization also poses economic, legal and technical challenges that must be addressed if it is to fulfil its potential. The BIS is committed to exploring aspects of these challenges through its analysis and Innovation Hub projects in the years ahead.

Find the new report here: https://www.bis.org/cpmi/publ/d225.pdf