Bank of England Warns of Financial Stability Risks from Asset Tokenization

According to CoinDesk, the Bank of England has expressed concerns about the potential financial stability risks arising from the growth of asset tokenization and unbacked cryptocurrencies and stablecoins. In its biannual Financial Stability report, the central bank noted that 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). 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, announced 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. Additionally, Archax, a U.K. registered crypto exchange, is planning on releasing an exchange for tokenized assets. The Bank of England warned that the increasing size of the tokenization market could pose risks for the wider financial environment. 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.