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The Bank for International Settlements (BIS) and the Financial Stability Board (FSB) have released papers on tokenization ahead of the G20 meeting. They acknowledged the potential of tokenization for improving safety and efficiency, however, they highlighted risks such as liquidity and maturity mismatch, leverage, and operational fragilities. The FSB believes that though tokenization presents risks, it currently does not pose a significant threat to the financial system. Both organizations suggest central banks consider how to regulate digital currencies. The BIS has several tokenization projects ongoing in its Innovation Hub.

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Just before the big Group of 20 (G20) meeting of finance bigwigs as well as central bank bosses on Oct. 23 and 24, both the Bank for International Settlements (BIS) and the Financial Stability Board (FSB) put out a bunch of papers. Brazil is in charge of the G20 group of mega-economies for 2024 and like India did last year, is pushing for a chat about digital currency.

The BIS and FSB each released papers focused on tokenization on Oct. 22. They did their studies separately, but they ended up talking about similar things in their papers.

So, what did they say about tokenization? Well, two main points stood out: tokenization is relatively rare and a bit tricky to understand. Plus, it comes with the same sort of risks we see in old-school finance, and a couple of unique ones. The FSB was pretty clear about this, saying that tokenization doesn’t really have a standard definition yet, and it’s been used in a bunch of different ways.

Some potential problems with tokenization, according to the FSB, include stuff like liquidity and maturity mismatch, leverage, asset price and quality, connection between parts of the system and operational fragilities. They did say, however, that given that tokenization is still pretty small, it doesn’t really put the financial system at risk for now. The BIS echoed the risk concerns and pointed out that these risks might crop up in unexpected ways because of how token arrangements may affect market structure.

But hey, it’s not all doom and gloom! The BIS reckons tokenization could be good for safety and efficiency too – but it does come with risks. The FSB says it’s a good idea to keep an eye on it and share information about it. Both sides suggest that central banks start thinking about how to regulate this stuff.

During its G20 presidency, India already gave the FSB’s suggestions for a global crypto regulation framework the thumbs up. They really want to see more international policing when it comes to this. With that in mind, the FSB has singled out tokenization as one of the key things it wants to regulate in 2024. The BIS isn’t just talking about it – it has several tokenization projects underway in its Innovation Hub that involve a lot of the world’s central banks.

Source: Cointelegraph