A new report by the Financial Stability Board (FSB) outlines the potential benefits and emerging risks associated with tokenisation within the financial system. Tokenisation, particularly using distributed ledger technology (DLT), is gaining attention for its promise to enhance efficiency and transparency. However, the report warns of stability risks if adoption scales significantly.
Tokenisation refers to the conversion of traditional assets, like money or securities, into digital tokens that can be traded and settled on a DLT platform. While this could streamline asset exchanges and broaden market access, the FSB report emphasizes that its primary focus is on the tokenisation of financial assets rather than central bank digital currencies (CBDCs) or crypto-assets.
Despite the potential of tokenisation, FSB data indicates low adoption levels at present. Although this limited scale means tokenisation does not yet present a substantial risk to financial stability, the FSB cautions that vulnerabilities could intensify if adoption grows without adequate regulation.
Among the key risks highlighted in the report are liquidity and maturity mismatches, leveraged positions, asset valuation, quality issues, and interconnectedness. Operational weaknesses, such as reliance on technology and cross-market complexity, could also introduce new forms of financial instability. The FSB warns that without careful oversight and regulation, the increasing complexity of tokenised assets may lead to unexpected consequences in volatile markets.
The FSB is working closely with other regulatory bodies to assess how to address these risks as tokenisation becomes more widespread. With regulatory considerations underway, the FSB’s report underscores the need for a proactive, cooperative approach to understanding and managing the intersection of tokenisation and traditional finance.
Read the full report here.
Image by Colton Sturgeon from Unsplash
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