Tokenisation in the context of money and other assets – BIS view

A new report titled “Tokenisation in the Context of Money and Other Assets: Concepts and Implications for Central Banks” by the Bank for International Settlements (BIS) and the Committee on Payments and Market Infrastructures (CPMI) explores the rising importance of tokenisation in regulated financial markets.

Tokenisation, in this instance, refers to generating digital representations of traditional assets on programmable platforms.

This allows transactions to be efficiently issued, traded, and settled using digital tokens, often powered by Distributed Ledger Technology (DLT).

The report highlights that tokenisation can simplify financial transactions by reducing frictions and improving the allocation of resources, with the potential to reduce transaction costs, enable new use cases, and better match supply and demand.

Tokenisation enables multi-asset, multi-function, and multi-party transactions, opening the door to platform-based intermediation.

It provides opportunities for greater efficiency, such as streamlined post-trade processes, reduced reconciliation needs, and automation through programmable smart contracts.

Key opportunities discussed include:

Enhanced financial inclusion by offering more accessible and secure payment options.
Improved cross-border payments, as seen in the BIS Innovation Hub projects, such as Project Nexus, which connects domestic payment networks across borders.
Reduced friction in financial markets, potentially benefiting bond issuances, asset management, and securities settlement.

However, tokenisation also presents risks, including credit and liquidity risks, operational risks, and the potential for market concentration, as token arrangements may alter market structures by consolidating multiple financial functions into a single platform.

This could lead to governance challenges and conflicts of interest.

The report emphasises the need for sound governance and risk management to ensure that tokenised arrangements support financial system safety and efficiency.

For central banks, tokenisation raises questions about whether and how to regulate, oversee, and possibly support these new arrangements.

Central banks could provide settlement assets, such as central bank digital currencies (CBDCs), to support tokenised systems.

However, the report warns of challenges, including legal uncertainties, regulatory fragmentation, and the concentration of power within dominant platforms.

While tokenisation offers substantial opportunities to improve financial market functioning, its full implications for financial stability, market structures, and central bank roles are still unfolding.

Central banks are advised to monitor developments closely and consider how best to react to these emerging trends.