Tokenizing assets on blockchain may elevate systemic risks, warns Bank of England

The Bank of England’s financial stability report highlights the potential risks and increasing interest in asset tokenization within the financial sector, underscoring the need for global regulatory coordination.

The report notes an increasing positivity among banks towards leveraging crypto technologies, including programmable ledgers and smart contracts, for the tokenization of money and real-world assets.

Tokenization, defined as issuing a digital asset representation, is rapidly gaining traction in the crypto ecosystem and is projected to evolve into a $10 trillion market by 2030, according to 21.co, an asset management company. This trend is exemplified by moves from major financial players like HSBC venturing into a digital-assets custody service focused on tokenized securities. Societe Generale has recently executed a €10 million sale of tokenized green bonds on the Ethereum (ETH) blockchain.

However, this growth trajectory raises concerns. The Bank of England’s report cautions that “increasing size could pose risks for the wider financial environment.” The expansion could “increase the interconnectedness of markets for crypto and traditional financial assets (since they are represented on the same ledger) and create direct exposures for systemic institutions.”

Acknowledging the current limitations of these risks, the Bank of England underlines the necessity of ongoing vigilance and global regulatory cooperation. The report asserts, “International coordination can reduce the risks of cross-border spillovers, regulatory arbitrage, and market fragmentation,” echoing the sentiments of lawmakers cheering for a coordinated regulatory approach to fund tokenization.