A report published today (Monday) by the Bank for
International Settlements (BIS) outlines the potential implications of money
tokenisation for central banks.

The report, prepared for the G20, is titled
Tokenisation in the Context of Money and Other Assets: Concepts and
Implications for Central Banks. It was developed with input from the BIS
Committee on Payment and Market Infrastructures (CPMI).

Tokenisation: Benefits and Risks

Tokenisation refers to creating digital representations of
traditional assets on programmable platforms. The report investigates the
global challenges in the regulated payments sector and the possible advantages
of tokenisation in reducing frictions in financial markets.

While tokenisation may
offer benefits such as lower costs and faster transactions, the report
emphasizes that risks must also be addressed.

It suggests that tokenisation
could change how pre- and post-trade functions are carried out for money and
other assets. Issues surrounding governance, legal frameworks, credit,
liquidity, custody, and operational risks will require careful attention.

“Tokenisation has significant potential to improve the
safety and efficiency of the financial system,” commented Agustín Carstens,
General Manager of the BIS.

“Central banks along with the private sector must continue
to explore novel technologies and develop solutions that are fit for purpose
for the future financial system. However, tokenisation also poses economic,
legal and technical challenges that must be addressed if it is to fulfil its
potential.”

While tokenisation could offer numerous benefits for the financial system and broader economy, costs and risks also need to be considered. Learn more this in report to the @g20org from the BIS and its Committee on Payments and Market Infrastructures https://t.co/8iWGPwKy6b pic.twitter.com/llRkIe7YCX

— Bank for International Settlements (@BIS_org) October 21, 2024

Central Banks Address Tokenisation Challenges

The report warns that risks associated with tokenisation may
differ from those faced by conventional market infrastructures. It points out
that these arrangements could change how financial markets are structured and
operated.

The BIS report identifies four key considerations for
central banks. First, central banks must respond to ongoing private sector
tokenisation initiatives, particularly regarding market fragmentation. Second,
they need to assess trade-offs between different types of settlement assets
within token arrangements.

Third, it is crucial to identify and regulate tokenisation
arrangements that may require oversight. Finally, central banks should evaluate
how token arrangements could impact monetary policy, especially in relation to
the structure of regulated markets and the demand for various forms of money.

Fabio Panetta, Governor, Bank of Italy and Chair, CPMI,
commented: “As with existing payment, clearing and settlement systems, the
potential capacity of token arrangements to improve financial system safety and
efficiency will require sound governance and risk management.”

“The well known risks of existing systems apply, but these
risks may materialise in different ways due to the effects of token
arrangements on market structure.”

This article was written by Tareq Sikder at www.financemagnates.com.

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