The Committee on Payments and Market Infrastructures (CPMI), under the Bank for International Settlements (BIS), recently published a report to the G20 titled “Tokenisation in the context of money and other assets: concepts and implications for central banks”. Focusing on the potential impacts tokenisation could have on existing frictions in financial markets, the paper proposes four key considerations for central banks.

Platform-based intermediation can bring “the potential to reduce the frictions present when disparate systems are needed to issue, trade, and settle different types of assets”, writes the report. The result of this could be decreased transaction costs, the enabling of new use cases, supply and demand that is better matched, and better capital allocation.

Nevertheless, sound governance will remain important, as the “well known risks of existing systems” will continue to apply. These could be related to credit, liquidity, custody, access policies, operations, or cyber issues. Additionally, the paper cautions that “these risks may materialise in different ways due to the effects of token arrangements on market structure”.

Key considerations

With these factors in mind, the report proposes four key considerations for central banks:

• Responding to ongoing private sector tokenisation initiatives
• Assessing the trade-offs and the appropriate balance between different types of settlement assets in token arrangements
• Identifying, monitoring, and assessing tokenisation arrangements that may need to be subject to sound regulation, supervision, and oversight
• Assessing the potential impact of token arrangements on monetary policy implementation

The overall assessment is that “future development of token arrangements remains uncertain, and many outcomes are conceivable”. It is therefore “useful to view it (tokenisation) as part of a longer term evolution in market structures”.