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 , 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.”

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 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.”