Asset Tokenization on Blockchains Could Increase Systemic Risks: BOE

The growth of asset tokenization could contribute to greater financial stability risks from unbacked crypto and stablecoins, the Bank of England said in its Financial Stability report.

Banks are becoming more positive about using crypto technologies such as programmable ledgers and smart contracts for the tokenization of money and real-world assets (RWA), the central bank said in the biannual report published Wednesday.

Tokenization, the process of issuing a digital representation of an asset, is a growing part of the crypto ecosystem and is forecast to become a $10 trillion market by 2030, according to asset management company 21.co. Last month, HSBC, one of the world’s largest banks, said it plans to start a digital-assets custody service for institutional clients focusing on tokenized securities. Earlier this week, Societe Generale, one of France’s largest banks sold 10 million euros ($10.8 million of tokenized green bonds on the Ethereum blockchain. And Archax, a U.K. registered crypto exchange, is planning on releasing an exchange for tokenized assets.

That increasing size could pose risks for the wider financial environment, the bank said. The boom 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,” the report said.

While the risks are limited at the moment, the BOE said it will continue to monitor the trend and urged for more global cooperation. Regulators in the country are already trying to establish how best to regulate and accommodate fund tokenization.

“International coordination can reduce the risks of cross-border spillovers, regulatory arbitrage, and market fragmentation,” the report said, something that lawmakers have been asking for.