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The Bank for International Settlements and the Financial Stability Board have called upon international leaders to pay more attention to both the opportunities and challenges brought on by tokenization
The Bank for International Settlements and the Financial Stability Board have highlighted the need for greater attention to tokenization, a digital process for representing real assets, in light of its potential impact on global finance.
Ahead of the G20 Finance Ministers and Central Bank Governors conference, scheduled for October 23 and 24, several publications were released by the BIS and FSB on October 22, delving into the topic of tokenization. With Brazil set to lead the G20 in 2024, following India's presidency last year, digital currencies continue to be a key area of discussion.
Emerging Risks in Tokenization
Despite conducting their studies independently, both the BIS and FSB arrived at similar conclusions. While tokenization has garnered public attention, it remains a relatively uncommon practice that is yet to be fully understood. According to the FSB, “There is no widely accepted definition of tokenization, and the term is not standardized across initiatives.”
In its assessment, the FSB identified key risks associated with tokenization, including liquidity imbalances, concerns over asset quality, and operational vulnerabilities. However, the FSB noted that the current scale of tokenization is too small to pose a threat to global financial stability.
Similarly, the BIS highlighted that tokenization is subject to the same risks as traditional finance, such as credit and liquidity challenges, custody concerns, and cybersecurity threats. Nevertheless, it added that these risks could manifest differently as tokenized systems alter market structures, particularly with the changing roles of intermediaries.
“These risks may materialize in different ways due to the effects of token arrangements on market structure, e.g., a change in the roles played by intermediaries when previously separate functions are combined on one platform,” the BIS stated.
Despite acknowledging these challenges, the BIS also noted the potential benefits of tokenization in enhancing the safety and efficiency of financial systems. Both organizations recommended that central banks begin exploring regulatory frameworks to address these evolving risks.
Growing Global Interest in Tokenization
India, which pushed for global cryptocurrency regulation during its G20 presidency, has expressed support for the FSB's proposals for a comprehensive international regulatory framework. Notably, tokenization is among the FSB's regulatory priorities for 2024.
Meanwhile, the BIS continues to drive tokenization-related projects through its Innovation Hub, collaborating with several of the world's central banks to explore the technology's potential.
In parallel with these discussions, the tokenization of real-world assets (RWAs) is rapidly gaining momentum and could revolutionize how we invest in everything from real estate to government bonds. According to a report by Tren Finance, the RWA sector could experience a 50x growth by 2030, with a projected market value between $4 trillion and $30 trillion. This transformation would drastically reshape traditional financial markets, making processes faster, cheaper, and more transparent through the use of blockchain technology.
“The integration of traditional finance with blockchain technology is not just a trend but a fundamental shift towards a more accessible, efficient, and dynamic financial ecosystem,” the Tren Finance report stated.
While still in its early stages, the movement is gaining steam. Stablecoins currently dominate the RWA market, valued at $185 billion, but tokenized treasuries and securities account for only $2.2 billion on-chain. However, notable projects like the BlackRock USD Institutional Digital Liquidity Fund (BUIDL), launched in March 2024, have already seen $514 million in assets on Ethereum, signaling growing institutional interest.
Nevertheless, experts are optimistic. The Tren Finance report predicts that RWAs will become a core component of financial markets by 2030, capturing a significant share of global markets and opening up more inclusive investment opportunities.
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