A new research report for the G20 on tokenization aims to highlight the various opportunities, risks and future considerations for central banks.
As explained in the update shared by BIS, tokenization could potentially have significant implications for the future of finance as well as the role of reserve banks in payments processes, managing monetary policy and maintaining overall financial stability.
While tokenization could potentially offer numerous benefits, the update from BIS pointed out that for the financial system and wider economy, costs and risks also need to be considered (in order to get a balanced view of the innovation and related breakthroughs).
The comprehensive BIS report further highlights four key or primary considerations for central banks as follows: 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.”
The report also mentioned that tokenization of money could have implications for the role of “central banks in payments, monetary policy and financial stability, according to a report to the G20 published today by the Bank for International Settlements (BIS).”
As explained in the detailed update, tokenization in the context of money and other assets: concepts and implications for central banks, which was reportelody “prepared by the BIS, including the BIS Committee on Payment and Market Infrastructures (CPMI), examined tokenization – 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 materialize in a “different manner to the challenges faced by conventional market infrastructures.”
As stated in the latest BIS update, tokenization arrangements provide platform-based intermediation for financial assets that may “lead to changes in how financial markets operate and are structured.”
In this particular context, the report focuses on “four key considerations” for central banks:
- responding to ongoing private sector tokenisation 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 tokenisation 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.