The BIS Innovation Hub lead, Cecilia Skingsley spoke about the need for the current financial industry to embrace change. It’s one thing if there’s a department exploring the possibilities of tokenization, but if the C-suite is happy with the way things currently work because they’re making money, that inhibits progress.
“Because the financial infrastructures of today, they are not going to be fit for tomorrow,” she said, talking during the Institute of International Finance (IIF) annual meeting.
She believes there are two key requirements for tokenization to work at a global scale. One is digital identity and the other is around regulation. Different jurisdictions are creating their own rules, but there’s a need for mutual regulatory recognition, which will take time. Otherwise tokenization might just take off in certain regions, without the potential global benefit.
While some are disappointed with the slow speed of progress of tokenization, Ms Skingsley said she would have been surprised if it had moved faster. The financial sector needs to be humble. “The last time the financial industry got really excited about new technology, it was during the securitization era,” she said, noting its contribution to the Global Financial Crisis. Hence, it’s good to be deliberate.
Talking about today’s Financial Stability Board (FSB) report on tokenization, she noted that the FSB’s job is to highlight risks. While everyone wants safety, the public sector wants “safe, safe, safe”, whereas the private sector wants flexibility.
She also shed light on the tradeoffs that central banks consider.
In order to encourage inclusion and competition, the public sector tends to embrace low barriers to entry. That’s until that triggers financial stability risks, at which point the questions is whether they want many participants or a few, and it’s easier to supervise a few.
Another trade off relates to liquidity. On the one hand, fragmented liquidity is not good for efficient markets. But at the other extreme, the public sector doesn’t want to see dependence on one particular marketplace. In terms of solving liquidity issues, Ms Skingsley doesn’t currently see tokenization as addressing it, although that could change. Most market observers describe the current tokenization sector as fragmented. However, it could swing from one extreme to the other.
Ms Skingsley also noted that a few central banks are adapting their real time gross settlement (RTGS) to accommodate DLT-based financial market infrastructures (FMIs). The Bank of England is one of them.
“An increasing number of central banks are wanting to allow for a DLT-based FMI. And then you will see the beginnings of bridges from the current to what could be future tech.”
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