Token arrangements may promote the availability of various assets as well as the capacity to integrate several functionalities on a single programmable platform, resulting in increased product flexibility and quicker transaction processing
The Bank for International Settlements (BIS) and the Committee on Payments and Market Infrastructures (CPMI) have published a paper on the tokenisation of money and assets. Tokenisation may help with market uniformity and asset programmability. This might increase the usage of platform-mediated supply of financial services across the securities life cycle.
This has been done as the Brazilian G20 Presidency has asked the BIS and CPMI to investigate the meaning of tokenisation in relation to money and other assets, as well as how to envision a tokenised environment that builds on the best features of the current monetary and financial system, while also discussing potential future implications.
The term “Token Arrangement” refers to programmable platforms and/or participating businesses that use digital tokens to facilitate financial market tasks. Currently, tasks required during the life cycle of a financial transaction are frequently undertaken by independent organisations under numerous activity- or asset-specific arrangements.
Token arrangements may host several parties, and depending on the access requirements and legal permissions, parties that presently rely on intermediaries could engage more directly than in traditional arrangements. Instead of using intermediaries, regulated issuers and investors might have direct access to the arrangement.
Parties from several jurisdictions might possibly engage on the same platform. Compared to traditional arrangements, this might modify the responsibilities of intermediaries and perhaps impact market structure, but it also creates new and complex governance issues, among other things.
Currently, DLT is the most popular technology powering token arrangements.
Tokenisation is making advances in the regulated banking industry. Regulated business institutions and the governmental sector are engaging in projects that address a variety of use cases, including tokenised bond issuance, tokenised commercial bank deposits, and tokenised repurchase agreements, among others.
The ultimate economic functions of financial markets are to reduce information and transaction costs, encourage risk sharing, and therefore enhance resource allocation and economic wellbeing.
Token arrangements may promote the availability of various assets as well as the capacity to integrate several functionalities on a single programmable platform, resulting in increased product flexibility and quicker transaction processing. Token arrangements, for example, might bring together tokens issued by many businesses (representing money or assets) on a same platform.
The functions that central banks play in financial stability, monetary policy, and payments may be affected by tokenisation. Whether and how central banks respond to growing private sector tokenisation activities is one of their top priorities. For instance, if markets evolve in a fragmented fashion, central banks may want to think about measures to promote interoperability.
The second thing to think about is if and how central banks evaluate the trade-offs and the proper ratio between various settlement asset kinds in token systems. This might involve the manner or format in which central banks offer central bank currency as a settlement asset for token agreements. Finding token arrangements that currently or perhaps in the future fit the requirements to be governed, supervised, and monitored at the level of each unique jurisdiction is the third factor to take into account. International standards like the PFMI may also apply to them. Relevant authorities may think about ways to collaborate within and across jurisdictions.
An important point is to think about is how token arrangements could affect the way monetary policy is implemented, for instance by altering the composition of regulated markets or the demand for central bank currency in comparison to other forms of money.
Token arrangements’ future evolution is still up in the air, with a wide variety of possible outcomes. The functions that central banks play in financial stability, monetary policy, and payments may be affected by tokenisation.
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