Tokenization can pose a risk to the financial system, warn FSB and BIS

What is tokenization?

Tokenization is the process of converting an asset into a digital token. This token can then be used to represent the asset on a blockchain, which is a distributed ledger that records transactions in a secure and transparent way.

Tokenization has a number of potential benefits, including increased liquidity, reduced costs, and improved transparency. However, it also poses a number of risks, including the potential for fraud, market manipulation, and systemic instability.

What are the risks of tokenization?

The FSB and BIS have identified a number of risks associated with tokenization, including:

• Fraud: Tokenized assets are vulnerable to fraud, as they can be easily transferred between wallets and exchanges.
• Market manipulation: Tokenized assets can be subject to market manipulation, as they can be traded on decentralized exchanges that are not subject to the same regulations as traditional exchanges.
• Systemic instability: Tokenized assets could pose a risk to the financial system if they are used to create new financial products that are not subject to the same regulations as traditional financial products.

What are the FSB and BIS doing to address the risks of tokenization?

The FSB and BIS are working together to address the risks of tokenization. They are developing a framework for the regulation of tokenized assets, which will include measures to mitigate the risks of fraud, market manipulation, and systemic instability.

The FSB and BIS are also working to raise awareness of the risks of tokenization among financial institutions and investors. They are encouraging financial institutions to develop robust risk management frameworks for tokenized assets, and they are urging investors to be aware of the risks involved in investing in tokenized assets.

What can financial institutions and investors do to mitigate the risks of tokenization?

Financial institutions and investors can take a number of steps to mitigate the risks of tokenization, including:

• Financial institutions:
  • Develop robust risk management frameworks for tokenized assets.
  • Conduct due diligence on tokenized assets before investing in them.
  • Only invest in tokenized assets that are issued by reputable issuers.
  • Monitor the performance of tokenized assets on a regular basis.
• Investors:
  • Be aware of the risks involved in investing in tokenized assets.
  • Only invest in tokenized assets that you understand.
  • Invest only what you can afford to lose.
  • Monitor the performance of your investments on a regular basis.