Bank of England Warns of Potential Risks to Financial Stability

The expansion of asset tokenization may increase the risk to financial stability posed by stablecoins and unbacked cryptocurrencies, according to the Financial Stability Report of the Bank of England.

The central bank stated in its biannual report released on Wednesday that banks are gaining confidence in the use of crypto technologies for the tokenization of money and real-world assets (RWA), including programmable ledgers and smart contracts.

According to asset management firm 21.co, tokenization, the process of issuing a digital representation of an asset, is a growing component of the cryptocurrency ecosystem and is projected to reach $10 trillion by 2030.

HSBC, one of the largest institutions in the world, announced last month that it intends to launch a digital asset custody service specializing in tokenized securities for institutional clients.

Societe Generale, one of the largest banks in France, sold tokenized green bonds worth 10 million euros ($10.8 million) on the Ethereum blockchain earlier this week.

Moreover, Archax, a cryptocurrency exchange registered in the United Kingdom, intends to launch an exchange for tokenized assets.

The bank stated that this expanding scale could pose risks for the broader financial environment.

The report says the boom “could generate direct exposures for systemic institutions and increase the interconnectedness of markets for crypto and traditional financial assets since they are represented on the same ledger.”

Although the current hazards are minimal, the BOE has stated that it will continue to monitor the trend and has called for increased international cooperation.

Already, national regulators are attempting to determine the most effective means of regulating and accommodating fund tokenization.

Legislators have requested that “international coordination reduce the risks of cross-border spillovers, regulatory arbitrage, and market fragmentation,” as stated in the report.