BIS, FSB Reports Highlight Benefits and Risks of Asset Tokenisation

The G20 nations initiated the development of a unified set of cryptocurrency regulations in 2023, with India leading the effort during its presidency. With Brazil taking the reins, the country aims to advance this work towards a global crypto framework. Global financial organisations are now providing their feedback on virtual digital assets (VDAs). Recently, the Bank of International Settlements (BIS) and the Financial Stability Board (FSB) have released their respective reports on VDAs that highlight the benefits and risks of asset tokenisation.

In their reports, the FSB and the BIS have pointed to a trend of assets tokenisation picking up pace on the global level and the implications this development could have on the global monetary ecosystem. Asset tokenisation is the virtual representation of physical assets on blockchain networks in the form of digital tokens. These assets can range from real estate, financial instruments, and bonds to art and commodities among other things.

A Markets and Markets report reveals that the global tokenisation market was valued at $2.3 billion (roughly Rs. 19,337 crore) in 2021 and it is projected to reach $5.6 billion (roughly Rs. 47,083 crore) by the end of 2026.

FSB Report Reveals Tokenisation is Growing

The report from the FSB said limited publicly available data on tokenisation suggests that its adoption is very low, but it appears to be growing. The Switzerland-based institution said that tokenising an asset could improve efficiency in clearing and settling transactions at reduced costs. Other potential impacts of this trend could add expanded opportunities for investors with more transparency and flexibility in utilisation.

Meanwhile, the FSB has expressed concerns around the financial stability vulnerabilities associated with blockchain tokenisation linked to “liquidity and maturity mismatch; leverage; asset price and quality; interconnectedness; and operational fragilities”.

Tokenised assets are currently being used for investments and trading. The FSB, however, has noted that in some cases tokenised assets have been used to complete payments.

BIS Says Effects of Tokenisation on Financial Systems Remains Uncertain

The BIS has collaborated with the Committee on Payments and Market Infrastructure (CPMI) to compile its report. This report claims that the effect of tokenisation on the future financial system remains uncertain, with a spectrum of potential adoptions.

“Although tokenised systems could allow for an unlimited set of anonymous market participants to engage in multiple functions and to have access to multiple assets, this outcome is highly unlikely in regulated financial markets,” the report states.

The BIS and the CPMI said that several factors will constrain the extent to which different assets and markets are tokenised which include investment trade-offs as well as policy, legal and regulatory setbacks.

Additionally, this report highlighted that the independence of tokenised assets is limited. Given that the issuance, recording, and transfer of tokens relies on the execution of functions on the linked platform, digital tokens cannot exist independently of the programmable platform. The report also acknowledges that the trend of tokenisation is making inroads into the regulated financial sector.

What Happens Next

The finance ministers and central bank governors of the G20 nations are scheduled to meet on October 23-24. The release of these reports by these financial institutes is well aligned with these meetings.

The members of the G20 will review the reports and take the discussions forward.

According to a Reuters report released in May, Brazil’s financial authorities have decided to analyse all Web3 use cases and their possible consequences to formulate new, detailed rules.

Once decided, these rules will be rolled out gradually to give industry players an ample timeline to bring their businesses into compliance with them. The Central Bank of Brazil has also claimed that it will be bring in a comprehensive set of rules to its Web3 community by the end of the year.