Widespread adoption of tokenization without adequate oversight could lead to market vulnerabilities and unpredictable financial disruptions, according to the Financial Stability Board (FSB). In a report assessing the impact of tokenization on financial stability, the FSB highlights several vulnerabilities including liquidity mismatches, leverage risk and the complexity of decentralized finance systems.
Despite this, with tokenized assets still a relatively esoteric part of the wider financial system, the FSB concludes that, tokenization does not pose a material risk at present, offering potential benefits including “improved efficiency, including in clearing and settlement, reduced costs, increased transparency, and greater flexibility”. But if adoption scales significantly without adequate oversight, vulnerabilities could lead to financial disruptions.
The FSB findings follow the latest annual Future of Finance report from SIX, which shows 46% of asset managers seeing themselves trading tokenized real-world assets using DLT in the next three years.
“Tokenization continue to represent a transformative opportunity for capital markets,” said Michele Curtoni, head of strategy at SIX Digital Exchange, in emailed commentary. “However, as the FSB points out, unexpected risks need to be planned for as tokenization scales up. The key is to promote liquidity and velocity of tokenization with institutional grade systems and platforms that are proven to work in financial markets. Safeguarding mechanisms exist today and using regulatory licensed platforms such securities depositories and regulated exchanges is the way to go to achieve real scalability. Innovation cannot come at the expense of financial stability.”