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While tokenization offers promising benefits for the future of financial systems, it also presents new costs and risks that central banks must carefully assess, according to the Bank for International Settlements (BIS). In a report released on Monday, October 21, the BIS highlighted these concerns in its briefing to the G20 titled “Tokenization in the Context of Money and Other Assets: Concepts and Implications for Central Banks.”
The report warns that the risks associated with tokenization—defined as the digital representation of traditional assets on programmable platforms—could manifest differently than those faced by conventional financial infrastructures. Fabio Panetta, Governor of the Bank of Italy and Chair of the BIS Committee on Payment and Market Infrastructures (CPMI), emphasized that while token arrangements could enhance the safety and efficiency of financial systems, they bring about new governance and risk management challenges.
“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. As tokenization introduces changes to market dynamics, central banks must ensure robust governance, legal frameworks, and risk management processes to mitigate potential threats.
The BIS report also noted that central banks should closely monitor private sector tokenization initiatives, assess various settlement assets within token arrangements, and identify those arrangements that may require regulatory oversight. Additionally, they must evaluate how tokenization could influence monetary policy implementation.
Agustín Carstens, General Manager of the BIS, stressed the importance of addressing the economic, legal, and technical challenges posed by tokenization if the technology is to reach its full potential. “The BIS is committed to exploring aspects of these challenges through its analysis and Innovation Hub projects in the years ahead,” Carstens added.
Tokenization’s programmable nature—supported by blockchain and smart technologies—enables enhanced security, automation, and flexibility in the execution of transactions, as reported by PYMNTS in August. In line with these developments, the BIS has been working alongside seven central banks, including the Federal Reserve Bank of New York, to test tokenization as a means of improving cross-border payments since April.
As tokenization becomes a central theme in the modernization of financial markets, the BIS report serves as a call for vigilance and preparedness in managing the risks that accompany this evolving technology.
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