The Future of Money is Tokenization, Says BIS Report
Switzerland-based monetary authority, the Bank of International Settlements (BIS), has made public its plan to build a global "unified ledger" to facilitate Central Bank Digital Currencies (CBDCs) and tokenized assets. Even though it acknowledges the potential of tokenization, BIS has expressed its misgivings about decentralized cryptocurrencies.
BIS predicts the financial systems of the future to be powered by tokenization processes on programmable platforms, regulated and supervised by central banks. In this concept, the unified ledger will act as a catalyst for the automation of financial transactions, utilizing CBDCs, tokenized deposits, and other digitized claims on financial or tangible assets.
The BIS report articulates, "We are approaching a major milestone in the monetary system, where the key transformational element is tokenization, which refers to the digital representation of claims on a programmable platform."
Nevertheless, BIS is not sparing in its criticism of the crypto sector, labeling it as a "flawed system." While it concedes that cryptocurrencies and decentralized finance (DeFi) have hinted at some advantages of tokenization, it asserts that cryptocurrencies cannot be the standard-bearers for the future of monetary systems. The report goes further to highlight the supposed downfall of crypto, emphasizing the role of trust facilitated by central banks as the crux of successful tokenization projects.
BIS extols the virtues of tokenization over traditional ledger systems. It illustrates a future where intermediaries' roles evolve from being bookkeepers to being custodians of the ruleset, while money or assets are converted into "executable objects" on programmable platforms.
The report highlights that tokens should not be seen as merely digital notations, but instead, they should be recognized for their ability to combine the records of the underlying assets with established rules. This opens up the possibility for tokens to be fine-tuned to cater to specific user needs or regulatory mandates for individual assets.
Among the significant potential applications of a unified ledger as outlined by BIS, the role of smart contracts is particularly highlighted. BIS sees smart contracts as a tool to tackle coordination problems often encountered in joint ventures, helping to prevent free-riding, and contributing to the stability of bank funding. Furthermore, BIS illustrates how a unified ledger could revolutionize supply chain financing, which is currently afflicted with problems like delayed payments and the necessity for suppliers to secure pre-production financing. BIS asserts that a unified ledger, embedded with real-time information incorporated into smart contracts, could address these long-standing issues.
The BIS report articulates, "We are approaching a major milestone in the monetary system, where the key transformational element is tokenization, which refers to the digital representation of claims on a programmable platform."
Nevertheless, BIS is not sparing in its criticism of the crypto sector, labeling it as a "flawed system." While it concedes that cryptocurrencies and decentralized finance (DeFi) have hinted at some advantages of tokenization, it asserts that cryptocurrencies cannot be the standard-bearers for the future of monetary systems. The report goes further to highlight the supposed downfall of crypto, emphasizing the role of trust facilitated by central banks as the crux of successful tokenization projects.
BIS extols the virtues of tokenization over traditional ledger systems. It illustrates a future where intermediaries' roles evolve from being bookkeepers to being custodians of the ruleset, while money or assets are converted into "executable objects" on programmable platforms.
The report highlights that tokens should not be seen as merely digital notations, but instead, they should be recognized for their ability to combine the records of the underlying assets with established rules. This opens up the possibility for tokens to be fine-tuned to cater to specific user needs or regulatory mandates for individual assets.
Among the significant potential applications of a unified ledger as outlined by BIS, the role of smart contracts is particularly highlighted. BIS sees smart contracts as a tool to tackle coordination problems often encountered in joint ventures, helping to prevent free-riding, and contributing to the stability of bank funding. Furthermore, BIS illustrates how a unified ledger could revolutionize supply chain financing, which is currently afflicted with problems like delayed payments and the necessity for suppliers to secure pre-production financing. BIS asserts that a unified ledger, embedded with real-time information incorporated into smart contracts, could address these long-standing issues.
