The Bank for International Settlements and the Financial Stability Board have called upon international leaders to pay more attention to both the opportunities and challenges brought on by tokenization, a digital process for representing real assets.
Several publications by the BIS and FSB were released ahead of the G20 Finance Ministers and Central Bank Governors conference on October 23 and 24. These papers, released on October 22, delve into tokenization and reflect its possible impact on global finance. With Brazil leading the G20 in 2024, following India’s presidency last year, the spotlight on digital currencies remains a key discussion area.
Tokenization: Emerging with Familiar Risks
Although the BIS and FSB conducted their studies independently, both emphasized similar points. Despite gaining more public attention, tokenization remains relatively uncommon and is still not fully understood. The FSB said, “Tokenization lacks a widely accepted definition, and the term is not standardized across various initiatives.”
Source: FSB
In their assessments, the FSB highlighted key risks associated with tokenization, such as liquidity imbalances, asset quality concerns, and operational vulnerabilities. Despite these issues, the FSB noted that tokenization’s current scale is too small to threaten global financial stability.
Similarly, the BIS pointed out that tokenization is subject to the same risks as traditional finance, including credit and liquidity challenges, custody concerns, and cybersecurity threats. However, it added that these risks could manifest differently as tokenized systems alter market structures, especially when intermediaries’ roles change.
Source: BIS
“These risks may materialize in different ways due to the effects of token arrangements on market structure, e.g., a change in the roles played by intermediaries when previously separate functions are combined on one platform,” BIS stated.
While acknowledging these challenges, the BIS also noted that tokenization holds promise for enhancing safety and efficiency in financial systems. Both organizations recommended that central banks begin exploring regulatory frameworks to address these evolving risks.
Global Interest in Tokenization Grows
India, which pushed for global cryptocurrency regulation during its G20 presidency, backed the FSB’s suggestions for a comprehensive international regulatory framework. Tokenization is now one of the FSB’s regulatory objectives for 2024.
Meanwhile, the BIS continues to drive tokenization-related projects through its Innovation Hub, collaborating with several of the world’s central banks to explore the technology’s potential.
In parallel with these discussions, the tokenization of real-world assets (RWAs) is rapidly gaining momentum and could revolutionize how we invest in everything from real estate to government bonds. According to a report from Tren Finance, the RWA sector could experience a 50x growth by 2030, with a projected market value between $4 trillion and $30 trillion. This transformation would drastically reshape traditional financial markets, making processes faster, cheaper, and more transparent through the use of blockchain technology.
“The integration of traditional finance with blockchain technology is not just a trend but a fundamental shift towards a more accessible, efficient, and dynamic financial ecosystem,” the Tren Finance report stated.
While still in its early stages, the movement is gaining steam. Stablecoins currently dominate the RWA market, valued at $185 billion, but tokenized treasuries and securities account for only $2.2 billion on-chain. Notable projects like the BlackRock USD Institutional Digital Liquidity Fund (BUIDL), launched in March 2024, have already amassed $514 million in assets on Ethereum, signaling growing institutional interest.
Nonetheless, experts are optimistic. The Tren Finance report predicts that RWAs will become a core component of financial markets by 2030, capturing a significant share of global markets and opening up more inclusive investment opportunities.
