BIS: Tokenization May Create New Risks for Central Banks

While there are potential benefits to the tokenization of money, there are also costs and risks that need to be considered, the Bank for International Settlements (BIS) said Monday (Oct. 21).

These risks may materialize in ways different from those faced by conventional market infrastructures, the BIS said in a press release announcing the release of its report to the G20, “Tokenisation in the context of money and other assets: concepts and implications for central banks.”

“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,” Fabio Panetta, governor of the Bank of Italy and chair of the BIS Committee on Payment and Market Infrastructures (CPMI), said in the release. “The well-known risks of existing systems apply, but these risks may materialize in different ways due to the effects of token arrangements on market structure.”

Tokenization — defined as “the generation and recording of digital representations of traditional assets on a programmable platform” — will require focus on governance and legal frameworks, credit and liquidity risks, and custody and operational risks, the release said.

The report said central banks should focus on responding to private sector tokenization initiatives, assessing different types of settlement assets in token arrangements, identifying tokenization arrangements that may require oversight, and assessing the potential impact of token arrangements on the implementation of monetary policy, per the release.

The economic, legal and technical challenges of tokenization must be addressed if the technology is to fulfill its potential, Agustín Carstens, general manager of the BIS, said in the release.

“The BIS is committed to exploring aspects of these challenges through its analysis and Innovation Hub projects in the years ahead,” Carstens said.

The programmable nature of tokens, underpinned by blockchain and smart technologies, means that data, assets and payments can be executed with improved security and sets of rules governing what’s changing hands and when, PYMNTS reported in August.

In April, the BIS said it was working in tandem with seven central banks — including the Federal Reserve Bank of New York — to test tokenization in a bid to improve cross-border payments.

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