FSB Report Highlights Future Risks of Tokenization Despite Low Current Impact

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Hongji Feng

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Hongji Feng

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Hongji is a crypto and tech reporter. He graduated from Northwestern University’s Medill School of Journalism with a Bachelor’s and a Master’s. He has previously interned at HTX (Huobi Global),…

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Last updated:

October 23, 2024 18:41 EDT

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The Financial Stability Board (FSB) released a report on October 22 examining the risks and opportunities of tokenization in traditional finance.

According to the report, the FSB found that while current risks remain minimal, they could grow with wider adoption. Tokenization’s immediate impact on global financial stability is limited due to its small scale and early adoption stage.

The FSB’s report noted that the risks posed by tokenization to global financial stability are currently limited due to its small-scale and early-stage nature.

Most tokenized assets are within pilot programs and niche markets, with limited integration into the broader financial system. This means that any disruptions in these areas are unlikely to impact traditional financial markets greatly at this time.

The report also highlighted several factors that have slowed tokenization’s integration into mainstream finance.

These include technical challenges, a lack of standardization across platforms, and gaps in the existing regulatory landscape. According to the FSB, these hurdles help contain the associated risks, as the broader financial market has not yet seen significant exposure.

Tokenization’s Potential Risks in the Future

Despite the current low impact, the FSB pointed to potential risks if tokenization’s adoption increases.

As these markets expand, challenges like legal uncertainties around asset ownership and managing cross-border transactions could become more significant. These issues could create vulnerabilities, particularly as connections between tokenized markets and traditional finance deepen.

“The limited publicly available data on tokenisation suggest that its adoption is very low but appears to be growing,” the report stated, “Notwithstanding these vulnerabilities, the use of tokenisation in the financial sector does not currently pose a material risk to financial stability, mostly due to its small scale.”

The FSB stressed the need for clear regulatory frameworks and international cooperation to manage emerging risks. Without coordinated oversight, the expanding role of tokenization could increase challenges to financial stability as the market matures and integrates further with traditional finance.