FSB And BIS Highlight Tokenization Risks And Call For Regulation

According to CoinDesk, the Financial Stability Board (FSB) and the Bank for International Settlements (BIS) have both raised concerns about the risks associated with tokenization in their recent reports. Tokenization, which involves the digitization of real-world assets using distributed ledger technology, could pose significant risks to financial stability if it scales up, according to the FSB and BIS. The FSB, which monitors and makes recommendations for the financial system, identified three main vulnerabilities: the underlying reference asset that has been tokenized, the participants in distributed ledger technology (DLT) based tokenization projects, and the interaction of new technology with legacy systems. In a letter to the Group of 20 nations, FSB Chair Klaas Knot emphasized that tokenization could impact financial stability if it leads to the creation of complex and opaque products that trade automatically, and if the identified vulnerabilities are not adequately addressed through oversight, regulation, supervision, and enforcement. The FSB also provided an update on its crypto roadmap, noting that while most countries have implemented its measures, inconsistencies remain. The BIS, the global standard-setter for banking regulation, also issued a report to the G20, highlighting both the potential benefits and risks of tokenization. The BIS report noted that tokenization could reduce frictions from using different systems to trade assets but warned that existing system risks such as credit, liquidity, and cyber risks could also apply to tokenization. The report also pointed out that these risks might manifest differently due to changes in market structure and the roles of intermediaries. Additionally, the BIS report highlighted the potential for conflicts of interest and called for sound governance to mitigate these risks. Nations worldwide have been exploring tokenization, with the FSB identifying it as a monitoring priority earlier this year. In September, more than 40 firms joined the BIS to explore tokenization for cross-border payments. The reports from both the FSB and BIS underscore the need for comprehensive regulation and oversight to address the risks associated with tokenization and ensure financial stability.