The Bank for International Settlements (BIS) and the Financial Stability Board (FSB) have both released a series of papers ahead of the Group of 20 (G20) Finance Ministers and Central Bank Governors meeting on Oct. 23 and 24.

Brazil is the president of the G20 world’s largest economies for 2024 and, like India last year, it called for a discussion of digital currency.

Both the BIS and FSB released papers on tokenization on Oct. 22. Although their studies were carried out independently, the BIS and FSB emphasized common themes.

Tokenization: new, but maybe not so different

While both papers were largely overviews, two ideas were emphasized: tokenization is rare and not entirely understood, and it presents the same risks as seen in traditional finance, along with a few all its own. The FSB insisted:

“Tokenisation has no generally accepted definition, […] and the term has not been used in a standardised way in connection with various initiatives.” 

The FSB raised issues such as liquidity and maturity mismatch, leverage, asset price and quality, interconnectedness and operational fragilities. “Due to its small scale, tokenization does not currently pose material financial stability risks,” it added. The BIS said:

“The well-known risks of existing systems apply [to tokenization], such as those related to credit and liquidity risks, custody, access policies, operational and cyber risks.” 

“These risks may materialize in different ways due to the effects of token arrangements on market structure, eg due to a change in the roles played by intermediaries when previously separate functions are combined on one platform,” it added.

The BIS concluded that tokenization can provide potential benefits for safety and efficiency, in addition to the risks. The FSB recommended more monitoring and information sharing. They both recommended that central banks begin to consider how to regulate it.

Source: Swift

Aligning interests internationally

India supported the FSB’s recommendations for a global regulatory framework for crypto when it held the G20 presidency and made its desire to see more international regulation well-known. 

The FSB set tokenization as one of its regulatory priorities for 2024 as well. The BIS has numerous tokenization projects in its Innovation Hub that involve many of the world’s central banks.

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