BOE Warns: Blockchain Asset Tokenization May Boost Systemic Risks

• Financial Stability Risks Arise from Asset Tokenization Growth, Says Bank of England
• Banks Praise Crypto Technologies for Tokenization
• Tokenization Booming
• HSBC and Societe Generale Embrace Tokenization
• Potential Risks of Tokenization
• Risk Monitoring and Regulatory Measures
• Importance of International Coordination

Financial Stability Risks Arise from Asset Tokenization Growth, Says Bank of England

The Bank of England (BoE) warns in its Financial Stability report that the burgeoning asset tokenization could pose heightened financial stability risks from unbacked cryptos and stablecoins.

Banks Praise Crypto Technologies for Tokenization

More and more financial institutions are expressing positive sentiments towards the usage of crypto technologies like programmable ledgers and smart contracts. These technologies have been pivotal in the tokenization of money and real-world assets (RWAs), based on the biannual report published by the central bank.

Tokenization Booming

Expected to become a $10 trillion market by 2030, asset tokenization, a process of digital representation of an asset, is a rapidly expanding sector of the crypto ecosystem, as per a report by asset management firm 21.co.

HSBC and Societe Generale Embrace Tokenization

In the recent past, HSBC, a globally recognized bank, announced its plans to launch a digital-assets custody service specifically for institutional clients, with a main focus on tokenized securities. Simultaneously, Societe Generale, a leading bank in France, sold tokenized green bonds worth 10 million euros on the Ethereum$2,315 -2.42% blockchain. Additionally, Archax, a registered crypto exchange in the U.K, has disclosed plans of releasing an exchange for tokenized assets.

Potential Risks of Tokenization

However, the Bank of England expressed concerns that such momentum could have implications on the broader financial landscape. It stated that this surge could increase the interconnectedness of markets for crypto assets and traditional financial assets (since they are represented on the same ledger); and create direct exposures for systemic institutions.

Risk Monitoring and Regulatory Measures

While the current risks are deemed to be manageable, the BoE declared its intentions to keep a close watch on this trend and called for enhanced global cooperation. The country's regulators are presently working on identifying suitable regulations to oversee and adapt fund tokenization.

Importance of International Coordination

International coordination can reduce the risks of cross-border spillovers, regulatory arbitrage, and market fragmentation, said the report, echoing the sentiments of several lawmakers.

Edited by Jonathan Stoker