A report published today (Monday) by the Bank for International Settlements (BIS) outlines the potential implications of money tokenisation for central banks.

The report, prepared for the G20, is titled Tokenisation in the Context of Money and Other Assets: Concepts and Implications for Central Banks. It was developed with input from the BIS Committee on Payment and Market Infrastructures (CPMI).

Tokenisation: Benefits and Risks

Tokenisation refers to creating digital representations of traditional assets on programmable platforms. The report investigates the global challenges in the regulated payments sector and the possible advantages of tokenisation in reducing frictions in financial markets.

While tokenisation may offer benefits such as lower costs and faster transactions, the report emphasizes that risks must also be addressed.

It suggests that tokenisation could change how pre- and post-trade functions are carried out for money and other assets. Issues surrounding governance, legal frameworks, credit, liquidity Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent Read this Term, custody, and operational risks will require careful attention.

“Tokenisation has significant potential to improve the safety and efficiency of the financial system,” commented Agustín Carstens, General Manager of the BIS.

“Central banks along with the private sector must continue to explore novel technologies and develop solutions that are fit for purpose for the future financial system. However, tokenisation also poses economic, legal and technical challenges that must be addressed if it is to fulfil its potential.”

While tokenisation could offer numerous benefits for the financial system and broader economy, costs and risks also need to be considered. Learn more this in report to the @g20org from the BIS and its Committee on Payments and Market Infrastructures https://t.co/8iWGPwKy6b pic.twitter.com/llRkIe7YCX

— Bank for International Settlements (@BIS_org) October 21, 2024

Central Banks Address Tokenisation Challenges

The report warns that risks associated with tokenisation may differ from those faced by conventional market infrastructures. It points out that these arrangements could change how financial markets are structured and operated.

The BIS report identifies four key considerations for central banks. First, central banks must respond to ongoing private sector tokenisation initiatives, particularly regarding market fragmentation. Second, they need to assess trade-offs between different types of settlement Settlement Settlement in finance refers to the process when a buyer makes payment and receives the agreed-upon services or goods. The term is used on exchanges such as New York Stock Exchange (NYSE) when security changes hands. When the asset is transferred and placed in the new buyer's name, it is considered settled. This process could take a few hours or several days after a trade is made. It depends on the clearance process. In the United States, the settlement date for marketable stocks is usually 2 Settlement in finance refers to the process when a buyer makes payment and receives the agreed-upon services or goods. The term is used on exchanges such as New York Stock Exchange (NYSE) when security changes hands. When the asset is transferred and placed in the new buyer's name, it is considered settled. This process could take a few hours or several days after a trade is made. It depends on the clearance process. In the United States, the settlement date for marketable stocks is usually 2 Read this Term assets within token arrangements.

Third, it is crucial to identify and regulate tokenisation arrangements that may require oversight. Finally, central banks should evaluate how token arrangements could impact monetary policy, especially in relation to the structure of regulated markets and the demand for various forms of money.

Fabio Panetta, Governor, Bank of Italy and Chair, CPMI, commented: “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.”

“The well known risks of existing systems apply, but these risks may materialise in different ways due to the effects of token arrangements on market structure.”