The Bank for International Settlements (BIS) has released a cautionary report as traditional financial institutions accelerate their exploration of tokenization, raising concerns about governance, regulatory frameworks and financial stability.
Tokenization, which converts real-world assets (RWA) such as real estate and securities into digital tokens, has drawn attention for its ability to streamline transactions and reduce costs. Mechanisms such as delivery versus payment (DvP) and payment versus payment (PvP) can help limit risks in financial markets.
According to the BIS:
“Tokenization could reshape market structures by reducing transaction costs and improving settlement processes.”
However, the BIS report, published on October 21, emphasized that while the benefits are clear, the risks cannot be ignored.
Regulatory uncertainty
Despite these promising benefits, the BIS report highlights that tokenized assets face significant legal and regulatory uncertainties. A key concern is whether existing laws extend to tokenized versions of financial products.
For example, in the US, traditional repurchase agreements (repos) are protected by automatic bankruptcy protection. Still, it is unclear whether tokenized repos would receive the same legal treatment.
The report also raised concerns about how tokenization could disrupt the role of central banks in payments, monetary policy and financial supervision.
The BIS emphasized that policymakers should assess potential trade-offs between different types of settlement assets and ensure proper regulation of private sector initiatives to maintain stability.
RWA tokenization growth
Despite the risks, financial institutions such as Barclays, Citi and HSBC are moving forward with tokenization projects. Trials such as the UK’s Regulated Liability Network (RLN) are already exploring the feasibility of tokenized deposits and programmable payments.
The tokenized real-world assets (RWAs) sector is expected to grow dramatically in 2024 and beyond. Tren Finance estimates that the market could grow to a value of between $4 trillion and $30 trillion by the end of the decade.
Even an average estimate of $10 trillion would represent a quantum leap from the current $185 billion, including stablecoins.
As the push for tokenization gains momentum, the BIS report serves as a timely reminder that while the technology holds promise, it comes with costs that require careful oversight.
The report stated:
“Efficiency gains will not be possible without significant investment and coordination.”
With tokenization poised to reshape the financial world, collaboration between the public and private sectors will be essential in mitigating risks and unlocking its full potential.