The Bank for International Settlements (BIS) released a report titled “Tokenization in the Context of Money and Other Assets: Concepts and Implications for Central Banks” on Monday, which examines how tokenization could transform the financial landscape and influence central banks’ roles.
The growing number of projects and experiments in regulated financial markets has heightened tokenization’s relevance for central banks. Against this backdrop, the report was prepared by the BIS and its Committee on Payments and Market Infrastructures (CPMI) for the Brazilian G20 Presidency.
The report introduces key concepts surrounding digital tokens and programmable platforms, explaining how token arrangements could reshape market structures by enabling platform-based intermediation across the entire lifecycle of financial assets. While tokenization may reduce transaction costs and enable innovative use cases, its potential to enhance financial system safety and efficiency will depend on robust governance and risk management.
For central banks, developments in tokenization present an opportunity to reassess the role of central bank money in an increasingly digitalized financial system. The report highlights several considerations, including the design of wholesale payment systems, oversight, and implications for monetary policy. Tokenization offers advantages like reduced transaction costs and faster processing times, attracting institutional investors. However, the BIS cautions that these benefits come with significant risks and challenges.
Governance and Financial Stability Risks
The BIS report identifies various risks tied to tokenization, such as potential governance and legal framework challenges, along with credit, liquidity, custody, and operational risks. These issues could emerge differently than in traditional infrastructures, requiring central banks to carefully evaluate their potential impact.
“Central banks need to assess the trade-offs and the appropriate balance between different types of settlement assets in token arrangements, identifying, monitoring and assessing tokenization arrangements that may need to be subject to sound regulation, supervision, and oversight,” the report said.
The BIS report also highlights how token arrangements could affect monetary policy, particularly in how they might alter the demand for central bank money and the structure of regulated markets. This evolving dynamic could reshape the way central banks operate in the future.
BIS General Manager Agustín Carstens emphasized that while tokenization could improve the safety and efficiency of financial systems, it also introduces legal, economic, and technical challenges that must be addressed.
The BIS report further noted that legal uncertainties might arise from tokenization, particularly regarding the unclear application of existing laws. For instance, in the U.S., repo transactions enjoy an automatic stay from bankruptcy—a benefit that might not extend to tokenized versions of these transactions.
Fabio Panetta, Chair of the Committee on Payments and Market Infrastructures (CPMI), stressed that effective governance and risk management are essential for realizing the full potential of token arrangements. “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,” Panetta said.
Tokenization Pilots by Major Financial Institutions
A growing number of global financial institutions are experimenting with tokenized deposits to enhance settlement efficiency and enable programmable payments. In September, UK Finance released results from the experimental phase of the Regulated Liability Network (RLN), which explores tokenized deposits and programmability. This phase tested five use cases, ranging from home purchases to tokenized bond settlements.
The trial addressed key questions about tokenization’s benefits, costs, and potential revenue opportunities. While significant advantages were identified, the report underscored the need for a broader range of use cases beyond those initially tested to ensure commercial success.
Participating banks included Barclays, Citi UK, HSBC UK, Lloyds Banking Group, Mastercard, NatWest, Nationwide, Santander UK, Standard Chartered, Virgin Money, and Visa.
