bank for international settlements: The financial industry needs to be cautious about asset tokenization

Source: Blockchain Knight

As traditional Financial Institutions accelerate their exploration of tokenization, the Bank for International Settlements (BIS) has issued a warning report, sparking concerns about governance, legal frameworks, and financial stability.

Tokenization converts real-world assets (RWA) such as property and securities into digital tokens, which are highly followed for their ability to simplify transactions and reduce costs.

Delivery versus Payment (DVP) and Payment versus Payment (PvP) mechanisms help to reduce risk in the financial market.

The Bank for International Settlements believes that 'tokenization can reshape market structure by reducing transaction costs and improving settlement processes'.

However, the report issued by the bank for international settlements on October 21 emphasizes that while the benefits are obvious, the risks should not be ignored.

Despite the bright prospects of these benefits, the report from the bank for international settlements emphasizes the significant legal and regulatory uncertainties facing tokenized assets.

A key issue is whether existing laws are applicable to tokenized financial products.

For example, in the United States, the traditional repo protocol (repos) is protected by automatic bankruptcy protection, but it is not clear whether tokenized repos will receive the same legal treatment.

The report also expresses concerns about how tokenization will disrupt the role of central banks in payments, monetary policy, and financial regulation.

The Bank for International Settlements emphasizes that decision-makers need to evaluate the potential trade-offs between different types of settlement assets and ensure appropriate regulation of measures for the private sector to maintain stability.

Despite the risks, Financial Institutions such as Barclays Bank, Citibank, and HSBC are still advancing tokenization projects.

The UK's Regulatory Responsibility Network (RLN) and other experimental institutions have been exploring the feasibility of tokenizing deposits and Programmability payments.

It is expected that the tokenization of real-world assets (RWA) industry will rise sharply in 2024 and beyond.

Tren Finance estimates that by the end of 2024, the market size will range from $4 trillion to $30 trillion.

Even the median estimate of $10 trillion will be a substantial leap from the current $185 billion (including stablecoins).

With the increasingly fierce development momentum of tokenization, the report from the bank for international settlements timely reminds people that although this technology has broad prospects, it also requires a price to be paid and careful regulatory supervision.

“Without substantial investment and coordination, it is impossible to improve efficiency.”

As tokenization is expected to reshape the financial industry, cooperation between the public and private sectors is crucial to managing risks and unlocking their full potential.