Tokenization is promising but decentralized cryptos are flawed — BIS

The Bank of International Settlement (BIS) has said that while tokenization is the future of global finance, cryptocurrencies have too many flaws to serve as the underlying basis for this future. 

The details 

• The BIS, a consortium of 63 central banks, made this stance in its Annual Economic Report that was published June 20, 2023.  
• The BIS noted that cryptocurrencies do not have the same level of trust as fiat issued by central banks, and their structural flaws make them unsuitable to be the main foundation of a monetary system. 
• The report went on to suggest a blueprint for a digital finance future resting essentially on central bank digital currencies (CBDCs). 
• The bank believes CBDCs are a “much firmer foundation” for tokenizing money and assets on a unified ledger. Wholesale CBDCs could function as bank reserves while retail CBDCs could be digital versions of cash available for everyday transactions. 
• The BIS’ proposed system would work with the concept of a unified ledger. On these ledgers, CBDCs, tokenized deposits and other tokenized assets would co-exist and be traded seamlessly in one place.  

Be smart  

• Tokenization, according to the BIS, is the process of recording claims on real or financial assets that primarily exist on a traditional ledger on a programmable digital platform.

Key quotes 

• On cryptocurrencies, the bank said: 

“Crypto and decentralized finance (DeFi) have offered a glimpse of tokenization's promise, but crypto is a flawed system that cannot take on the mantle of the future of money... [because] it lacks the anchor of the trust in money provided by the central bank.” 

Key background

• The BIS has previously expressed strong criticism towards cryptocurrencies and their impact on traditional finance. 
• In 2021, the BIS warned that Bitcoin could break down altogether and that central banks should issue digital currencies if at all they are needed. 
• In the same year, it also warned that decentralized finance (deFi) creates financial vulnerabilities that exceed those in traditional finance and that stablecoins are particularly vulnerable to “classic runs.” 
• The new report comes a few days after the International Monetary Fund (IMF) proposed a similar pro-central bank system for settling cross-border transactions. The global lender also advocated for tokenizing central bank reserves on a single platform, per a Mariblock report.