The G20 countries launched a unified set of cryptocurrency regulations in 2023, and India led the effort during its presidency. With Brazil taking power, the country aims to push the work toward a global crypto framework. Global financial organizations are now providing feedback on virtual digital assets (VDA). Recently, the International Settlements Bank (BIS) and the Financial Stability Commission (FSB) have released their respective reports on the VDA, which highlight the benefits and risks of asset symbolization.
In their report, FSB and BIS pointed out that a trend in asset tagging has reached pace worldwide and that this development may have an impact on the global monetary ecosystem. Asset tokenization is a virtual representation of actual assets on the blockchain network in the form of digital tokens. These assets range from real estate, financial instruments and bonds to art and commodities.
Markets and market reports show that the global token market value of US$2.3 billion (approximately Rs 19,337 crore) in 2021, and it is expected to reach US$5.6 billion (approximately Rs 47,083 crore) by the end of 2026.
FSB report shows symbolization is growing
The FSB report said that limited public data on symbolization suggests that its adoption is very low, but appears to be growing. The Swiss-based agency said that increasing the facilities at reduced costs can increase the efficiency of clearing and resolving transactions. Other potential impacts of this trend may add more transparency and flexibility to investors.
Meanwhile, FSB expressed concerns about the fragility of financial stability associated with “blockchain tokenization related to liquidity and maturity mismatch; leverage; asset price and quality; interconnection; and operational vulnerability.”
Token assets are currently being used for investment and trading. However, the FSB notes that in some cases, the tagged assets have been used to complete payments.
BIS says the impact of tokenization on the financial system remains uncertain
The BIS has partnered with the Commission on Payments and Market Infrastructure (CPMI) to compile its report. The report claims that the impact of symbolization on future financial systems remains uncertain and has potential adoption.
“While the token system can allow an unlimited set of anonymous market participants to engage in multiple functions and acquire multiple assets, this outcome is extremely unlikely in regulated financial markets,” the report noted.
BIS and CPMI said there are several factors that will limit the extent to which different assets and markets are tokenized, including investment trade-offs and policy, legal and regulatory setbacks.
In addition, the report emphasizes that the independence of token assets is limited. Given that the issuance, recording and transmission of tokens relies on the execution of functions on the linked platform, digital tokens cannot be independent of programmable platforms. The report also acknowledges that the tokenization trend is entering the regulated financial sector.
What will happen next
The Finance Minister of the National People’s Government and the Governor of the Central Bank are scheduled to meet from October 23 to 24. These reports released by these financial institutions are very consistent with these meetings.
Members of the G20 will review the report and discuss it.
Brazil’s financial authorities have decided to analyze all Web3 use cases and their possible consequences to formulate new detailed rules, according to a Reuters report released in May.
Once determined, these rules will be rolled out gradually to give industry participants a sufficient timeline to make their businesses fit into them. The Brazilian Central Bank also claims it will bring a comprehensive set of rules to its Web3 community by the end of this year.
