Bank of England cautions about potential increase in systemic risks due to asset tokenization on blockchain
The financial stability report released by the Bank of England draws attention to the growing interest and potential risks associated with asset tokenization in the financial sector, emphasizing the importance of global regulatory coordination.
The report highlights the increasing optimism among banks regarding the utilization of cryptocurrency technologies, such as programmable ledgers and smart contracts, for the tokenization of both money and tangible assets.
Tokenization, which involves the issuance of digital representations of assets, is gaining significant momentum within the cryptocurrency ecosystem. It is projected to become a $10 trillion market by 2030, according to asset management company 21.co. This trend is exemplified by major financial institutions like HSBC venturing into digital-assets custody services focused on tokenized securities.
Societe Generale recently made headlines by executing a €10 million sale of tokenized green bonds on the Ethereum blockchain.
However, this rapid growth raises concerns. The Bank of England’s report warns that the increasing size of the tokenization market could pose risks to the broader financial environment. The expansion of tokenization could lead to greater interconnectedness between crypto and traditional financial assets, as they are represented on the same ledger, and could result in direct exposures for systemic institutions.
Recognizing the current limitations in managing these risks, the Bank of England emphasizes the need for ongoing vigilance and global regulatory cooperation. The report states, “International coordination can mitigate the risks of cross-border spillovers, regulatory arbitrage, and market fragmentation,” aligning with the stance of lawmakers who advocate for a coordinated regulatory approach to fund tokenization.
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