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, raising concerns about governance, legal frameworks and financial stability.

Tokenization, which converts real-world assets (RWAs) such as property and securities into digital tokens, has attracted much attention for its ability to simplify transactions and reduce costs.

Mechanisms such as delivery-to-payment (DvP) and payment-to-payment (PvP) help reduce risks in financial markets.

The BIS believes that "tokenization can reshape market structure by cutting transaction costs and improving settlement processes."

However, the BIS report released on October 21 stressed that while the benefits are obvious, the risks cannot be ignored.

Despite the promising benefits, the BIS report emphasizes that tokenized assets face significant legal and regulatory uncertainties.

A key question is whether existing laws apply to tokenized financial products.

For example, in the United States, traditional repurchase agreements (repos) are protected by automatic bankruptcy protection, but it is unclear whether tokenized repos will receive the same legal treatment.

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

The BIS emphasizes that policymakers need to assess potential trade-offs between different types of settlement assets and ensure that private sector initiatives are appropriately regulated to maintain stability.

Despite the risks, financial institutions such as Barclays, Citigroup, and HSBC are moving forward with tokenization projects.

Experimenters such as the UK's Regulatory Responsibility Network (RLN) are already exploring the feasibility of tokenized deposits and programmable payments.

The tokenized real asset (RWA) industry is expected to grow dramatically in 2024 and beyond.

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

Even the midpoint of the $10 trillion estimate would represent a significant jump from the current $185 billion (including stablecoins).

As tokenization gathers momentum, the BIS report is a timely reminder that while the technology holds great promise, it also comes with a cost and requires careful regulatory oversight.

“Without significant investment and coordination, there will be no efficiency gains.”

As tokenization promises to reshape the financial industry, collaboration between the public and private sectors will be critical to reducing risks and unlocking its full potential.