The BIS defines tokenisation as the generation and recording of digital representations of traditional assets on a programmable platform. In a report prepared for the G20, the BIS says the developing trend could have implications for the role of central banks in payments, monetary policy and financial stability.

Earlier this year, the BIS together with seven central banks embarked on a major project to explore tokenisation of cross-border payments. Project Agora project builds on the unified ledger concept proposed by the BIS and will investigate how tokenised commercial bank deposits can be integrated with tokenised wholesale central bank money in a public-private programmable core financial platform. Today’s report focusses on the possible benefits of tokenisation in addressing existing frictions in financial markets, examining new use cases and functions that are currently being explored around the world. It notes that, while the potential benefits of tokenisation, such as cheaper and speedier transactions, have attracted interest, the costs and risks need to be considered. They may also affect how pre- and post-trade functions are executed for money and other assets. In addition, ensuring appropriate governance and legal frameworks, credit and liquidity risks, as well as custody and operational risks will also require focus. The report also highlights that risks may materialise in a different manner to the challenges faced by conventional market infrastructures. Tokenisation arrangements provide platform-based intermediation for financial assets that may lead to changes in how financial markets operate and are structured. The policy implications for central banks are manifold, including whether to foster interoperability in the case of fragmenting markets, assessing the trade-offs between different types of settlement assets, identifying areas for regulation and supervision, and assessing the potential impact of token arrangements on monetary policy implementation, for example through changes in the structure of regulated markets or the demand for central bank versus other types of money. Agustín Carstens, general manager of the BIS, says: "Tokenisation has significant potential to improve the safety and efficiency of the financial system. Central banks along with the private sector must continue to explore novel technologies and develop solutions that are fit for purpose for the future financial system. However, tokenisation also poses economic, legal and technical challenges that must be addressed if it is to fulfil its potential. The BIS is committed to exploring aspects of these challenges through its analysis and Innovation Hub projects in the years ahead."