Bank for International Settlements: Financial industry should approach asset tokenization with caution
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Bank for International Settlements: Financial industry should approach asset tokenization with caution
The Bank for International Settlements also emphasized that tokenized assets face significant legal and regulatory uncertainties.
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Translation: Blockchain Knight
As traditional financial institutions accelerate their exploration of tokenization, the Bank for International Settlements (BIS) has issued a cautionary report, raising concerns over governance, legal frameworks, and financial stability.
Tokenization converts real-world assets (RWA), such as property and securities, into digital tokens, gaining attention for its ability to streamline transactions and reduce costs.
Mechanisms like delivery versus payment (DvP) and payment versus payment (PvP) help mitigate risks in financial markets.
The BIS stated, "Tokenization could reshape market structures by reducing transaction costs and improving settlement processes."
However, the BIS report released on October 21 emphasized that while benefits are evident, risks cannot be overlooked.
Despite these promising advantages, the BIS report highlights that tokenized assets face significant legal and regulatory uncertainties.
A key issue is whether existing laws apply to tokenized financial products.
For example, in the United States, traditional repurchase agreements (repos) are protected by automatic bankruptcy stays, but it remains unclear whether tokenized repos would receive the same legal treatment.
The report also raises concerns about how tokenization might disrupt central banks' roles in payments, monetary policy, and financial regulation.
The BIS emphasizes that policymakers need to assess potential trade-offs between different types of settlement assets and ensure appropriate oversight of private-sector initiatives to maintain stability.
Despite the risks, financial institutions such as Barclays, Citigroup, and HSBC are moving forward with tokenization projects.
Initiatives like the UK's Regulated Liability Network (RLN) have already begun exploring the feasibility of tokenized deposits and programmable payments.
The real-world asset (RWA) tokenization industry is expected to experience rapid growth in 2024 and beyond.
Tren Finance estimates that by the end of 2024, the market size could range from $4 trillion to $30 trillion.
Even the midpoint estimate of $10 trillion would represent a massive leap from the current $18.5 billion (including stablecoins).
As momentum behind tokenization builds, the BIS report serves as a timely reminder that while the technology holds great promise, it also comes at a cost—requiring careful regulatory oversight.
"Efficiency gains cannot be achieved without substantial investment and coordination."
As tokenization stands poised to reshape finance, collaboration between public and private sectors will be crucial to mitigating risks and unlocking its full potential.
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