The Bank for International Settlements (BIS) Committee on Payments and Market Infrastructures (CPMI) released its G20 joint report, “Tokenisation in the context of money and other assets: concepts and implications for central banks”.
Repo
Although the scale of token arrangements is currently small, initiatives that have reached the production stage are increasing in scale and scope. For example: tokenized repo transactions with a volume of more than $1 trillion are facilitated monthly; payments with a volume of over $1 billion/day are settled; and the volume of tokenized bond issuances is on the rise.
Turning to investments in infrastructures, large banks have continued to invest in platforms. However, according to Forbes (2024), only the largest banks continue to pursue proprietary projects, while the others tend to have shifted to consortiums and joint projects.
With respect to token arrangements, it could arise in cases where the application of existing laws to the concept of tokens is not clear or certain. For example, in the US, repo transactions receive an automatic stay from bankruptcy, an advantage that may not extend to tokenized versions of repo transactions.
Private sector projects also vary in terms of the assets present in the arrangement, including the type of settlement asset used (eg stablecoins, commercial bank money). As regards the public sector, the emphasis has primarily been on central bank money as a settlement asset in token arrangements and a number of central banks are actively exploring how programmable platforms could be implemented.
Collateral
Token arrangements may be exposed to liquidity risk in several ways. First, they may be designed with shorter settlement cycles compared with current market conventions for the same asset class. In the extreme, instant trading and settlement requires pre-funding, thus implying a potentially significant increase in liquidity costs.
Second, tokens can be programmed to execute transactions when certain conditions are met, which is a way to prevent credit risk but could potentially trigger highly correlated movement of funds, thus creating correlated liquidity risks. At the same time, mechanisms do exist in conventional systems that could be replicated in token arrangements to limit liquidity risk, such as auto-collateralization.
Investment risk for token arrangements will generally be similar to conventional financial market infrastructures. For example, investment risk will be influenced by the investment policies of the arrangement, and considerations related to the technology, eg for arrangements that specialize in on-chain collateral management.
First, the rules and standards of token arrangements, such as operating hours, value date rules or access policies of token arrangements, may differ from existing systems in some jurisdictions, and may affect the operational implementation of monetary policy by central banks.
From a legal point of view, the eligibility of tokenized assets as monetary policy collateral could also be affected, even though they may be issued on platforms operated by various private players and have specific characteristics.