Global Financial System Monitoring Body Picks Holes in DLT Tokenization Model
The latest report by the Financial Stability Board (FSB) has highlighted the implications of tokenization – the digital representation of traditional assets using distributed ledger technology (DLT). They include that DLT could, in some cases, entail new forms of concentration and cyber risks as well as cause market integrity issues to arise in relation to the transparency that is built into the technology.
The FSB, which monitors the global financial system to coordinate the work of national financial authorities and international standard-setting bodies for effective regulatory and supervisory purposes, also notes that tokenization “might create an appearance of liquidity in assets that are inherently illiquid”.
However, some industry experts have suggested the need for further research as their views differ to the points raised by the report which shows that global investment in FinTech rose to a record $112 bln in 2018. To them, some of the risks presented in the report show a lack of understanding of the key elements of decentralised systems.
“The risks mentioned in this report are not at all unique to the issues of tokenization,” says Remy Jacobsen, the founder of RealT, who believes there are some misconceptions around tokenization that are worth exploring. “In fact, the lack of clarity behind assets was the core of the issue behind the 2008 crash. The opaqueness of Wall Street removed investors ability to value the assets appropriately.”
The co-founder of NEM Ventures, the investments arm of the NEM blockchain ecosystem, Dave Hodgson, maintains the need for further engagement as the tokenisation of “various financial, property, and other assets will continue” for reasons.
He explains: “This presents an opportunity for new economic models to increase market efficiencies by reducing intermediary delays and fees; it can also ensure governance has greater transparency and adherence. Tokenisation allows access to truly global debt and equity markets across borders for everyday companies.”
The FSB proposes for G20 authorities to consider the applicability and effectiveness of current financial regulations for relevant businesses and activities based on DLTs and explore ways to address potential regulatory gaps and financial stability concerns. It states that DLTs are likely to continue to evolve rapidly hence early liaison between regulators and stakeholders might help ensure regulatory objectives are considered in the initial design of technical protocols and applications. This is to “help limit the emergence of unforeseen complications at a later stage.”
FSB is based in Switzerland. Its members include central banks of European Union countries, China, Australia, USA, Brazil, Argentina, Japan and others.