The Growth of Asset Tokenization Poses Financial Stability Risks, Says Bank of England

The Bank of England has expressed concern over the potential risks to financial stability that could arise from the growth of asset tokenization, particularly in relation to unbacked cryptocurrencies and stablecoins. In its Financial Stability report, the central bank noted that banks are increasingly embracing crypto technologies for the tokenization of money and real-world assets (RWA), using programmable ledgers and smart contracts.

Tokenization refers to the process of issuing a digital representation of an asset. This is an expanding segment of the cryptocurrency ecosystem and is expected to become a $10 trillion market by 2030, according to asset management company Major financial institutions have already shown interest in this space, with HSBC announcing plans to launch a digital-assets custody service for institutional clients focused on tokenized securities. Meanwhile, Societe Generale, one of France’s largest banks, recently sold 10 million euros ($10.8 million) worth of tokenized green bonds on the Ethereum blockchain. Additionally, Archax, a UK-based cryptocurrency exchange, is preparing to launch a platform for trading tokenized assets.

While the increasing size of the asset tokenization market presents exciting opportunities, the Bank of England highlights the potential risks it may bring to the broader financial environment. The central bank asserts that this boom in tokenization could increase the interconnectedness between markets for crypto assets and traditional financial assets, as both would be represented on the same ledger. Consequently, there could be direct exposures to systemic institutions.

At present, the risks associated with asset tokenization are limited. Nonetheless, the Bank of England pledges to closely monitor this trend and emphasizes the need for global cooperation. The central bank urges for international coordination to mitigate the risks of cross-border spillovers, regulatory arbitrage, and market fragmentation. This aligns with calls from lawmakers for a more coordinated global regulatory framework to oversee the emerging field of tokenized assets.

Overall, while asset tokenization brings promising advancements to the financial industry, the Bank of England’s cautionary stance underscores the importance of assessing and managing potential risks. As the market continues to evolve, regulatory frameworks and international cooperation will play a pivotal role in ensuring the stability and security of tokenized assets and their integration with traditional financial systems.

Source: [Coindesk](