Report for the G20 on tokenisation highlights the opportunities, risks and future considerations for central banks
- Tokenisation could have implications for the future of finance and the role of central banks in payments, monetary policy and financial stability.
- While tokenisation could offer numerous benefits for the financial system and broader economy, costs and risks also need to be considered.
- BIS report highlights four key considerations for central banks: private sector initiatives; trade-offs between different types of settlement assets; sound regulation, supervision and oversight for tokenisation; and the impact on monetary policy implementation.
Tokenisation 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).
Tokenisation in the context of money and other assets: concepts and implications for central banks, which was prepared by the BIS, including the BIS Committee on Payment and Market Infrastructures (CPMI), examined tokenisation - 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 tokenisation 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 tokenisation, 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 materialise in a different manner to the challenges faced by conventional market infrastructures. Tokenisation arrangements provide platform-based intermediation for financial assets that may lead to changes in how financial markets operate and are structured.
In this 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.
Tokenisation has significant potential to improve the safety and efficiency of the financial system. Central banks along with the private sector must continue to explore novel technologies and develop solutions that are fit for purpose for the future financial system. However, tokenisation also poses economic, legal and technical challenges that must be addressed if it is to fulfil its potential. The BIS is committed to exploring aspects of these challenges through its analysis and Innovation Hub projects in the years ahead.
As with existing payment, clearing and settlement systems, the potential capacity of token arrangements to improve financial system safety and efficiency will require sound governance and risk management. The well known risks of existing systems apply, but these risks may materialise in different ways due to the effects of token arrangements on market structure. As follow-up to this report, the CPMI will continue its exploration of the topic, including the impact of innovation on the role of central bank money.