Tokenisation of money presents numerous advantages, but it also introduces economic, legal, and technical challenges that must be addressed for it to reach its full potential, according to the Bank for International Settlements (BIS).
The BIS defines tokenisation as the creation and recording of digital representations of traditional assets on a programmable platform. In a report prepared for the G20, the BIS discusses the implications this trend could have on the roles of central banks in payments, monetary policy, and financial stability.
Earlier this year, the BIS collaborated with seven central banks to launch a significant initiative focused on the tokenisation of cross-border payments. The Project Agora aims to build on the unified ledger concept proposed by the BIS and will explore how tokenised commercial bank deposits can be combined with tokenised wholesale central bank money on a public-private programmable core financial platform.
The recent report emphasizes the potential benefits of tokenisation in alleviating existing frictions in financial markets while examining new use cases and functions that are being explored globally. While interest in tokenisation is driven by its potential for cheaper and faster transactions, the report warns that associated costs and risks need careful consideration.
The challenges of tokenisation may also impact how pre- and post-trade functions are conducted for money and other assets. Key concerns include establishing suitable governance and legal frameworks, as well as addressing credit, liquidity, custody, and operational risks.
Moreover, the report indicates that risks associated with tokenisation could manifest differently than those encountered by traditional market infrastructures. The introduction of platform-based intermediation for financial assets may lead to changes in the operational structure of financial markets.
Central banks face numerous policy implications, such as promoting interoperability in increasingly fragmented markets, weighing the trade-offs between various settlement assets, identifying regulatory and supervisory needs, and assessing the potential effects of token arrangements on monetary policy implementation, including shifts in regulated market structures or the demand for different types of money.
Agustín Carstens, general manager of the BIS, emphasizes that “Tokenisation has significant potential to enhance the safety and efficiency of the financial system. Central banks, in partnership with the private sector, must continue to explore innovative technologies and develop solutions tailored for the future financial system. However, tokenisation also poses economic, legal, and technical challenges that must be addressed to realize its full potential. The BIS is dedicated to analyzing these challenges through its ongoing research and Innovation Hub projects.”