BIS and FSB Warn of the Rising Risks of Tokenization

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The Financial Stability Board (FSB) and the Bank for International Settlements (BIS) have issued critical warnings regarding the pitfalls of tokenization. In a recent letter addressed to the G20 nations, the FSB flagged the potential risks associated with the growing trend of tokenizing real-world assets.

These warnings come at a time when countries, financial institutions, and decentralized networks are exploring the benefits of tokenization, especially when it comes to cross-border payments.

Tokenization: What Is It and Why Does It Matter?

Tokenization refers to digitizing Real-World Assets (RWA), such as securities, using distributed ledger technology (DLT), including blockchain. This transformation promises faster and more efficient asset trading by removing traditional intermediaries and reducing the hassles involved in transactions. 

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Tokenization has the potential to revolutionize financial markets, enable real-time settlement, ensure greater transparency, and provide lower costs. Notably, RWAs like PropiChain and the BRTR token offer innovative solutions for investors to manage and monitor their physical assets.

Yet, the FSB report suggests these benefits have significant risks that must be addressed before tokenization scales further.

FSB Highlights Tokenization’s Major Vulnerabilities

In its latest report, the FSB, which monitors and advises on the global financial system, identified some vulnerabilities that tokenization introduces. It cautioned that if the RWAs converted into digital tokens become unstable, it could increase financial risks. 

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The agency pointed out that the people involved in these projects, like developers and issuers, might not have enough insight into the technology’s risks. The FSB also mentioned that combining new digital technology with old financial systems can create problems. The FSB Chair, Klaas Knot, told the G20 nations that if tokenization grows without proper regulation, it could lead to complicated products that harm financial stability.

The BIS Weighs In

The BIS, known for setting banking standards worldwide, echoed the FSB’s concerns in its report. While it recognized tokenization’s role in streamlining cross-border payments, it highlighted its risk if it became mainstream. 

The BIS warned that traditional risks like credit, liquidity, and cyber threats exist in tokenized systems but may appear in new ways as intermediaries’ roles change.

In addition, the bank said that tokenization can create new vulnerabilities and conflicts of interest as it merges functions like trading and clearing on one platform. It reiterated that without proper governance, these issues could destabilize markets.

A Call for Regulatory Vigilance

The FSB and BIS emphasized the need for strong governance and regulation to manage tokenization risks. While many countries have started implementing crypto regulations, the FSB warned of inconsistencies that could lead to gaps. 

The urgency of the issue is clear. More than 40 firms recently joined the BIS in exploring tokenization’s potential for cross-border payments, signaling a growing interest in the technology. However, without proper regulation, tokenization’s risks may outweigh its benefits.

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