BIS sees tokenisation benefits in trillion-dollar bond market ‘even if gains per trade are small’

Tokenising the trillion-dollar government debt market could yield “sizable benefits,” the Bank for International Settlements said.

Financial institutions including BlackRock and Citigroup have talked up the opportunity in tokenisation, the transferring of real-world assets on to blockchains. They tout quicker transaction settlement, lower costs, and increased investor access to a wider range of investments.

But some have said experiments with tokenising assets like bonds, which already trade on electronic markets, have failed so far.

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The BIS’ fanned that debate further on Tuesday by saying that markets that are already digital should not be overlooked for their tokenisation potential. That’s because of high trading volumes.

“As modest gains in large volume markets can add up to significant amounts, one should not discard the aggregate benefits of tokenisation,” the BIS said.

“In a trillion-dollar market with high turnover, automated trading of securities on a common platform would yield sizeable benefits, even if the gains per trade are small.”

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The BIS — also known as the banker to central banks — is not known for its love of crypto. Earlier this year, the bank’s head, Agustín Carstens, said cryptocurrencies have lost the “battle” against fiat currencies and cannot be a viable alternative to them. Still, the BIS continues to research blockchain technology, DeFi, and CBDCs under its innovation hub.

The economic, legal, and technical challenges involved with tokenizing particular asset classes mean that there is a “continuum,” or spectrum of trade-offs along which businesses may have to direct their efforts, the BIS’ bulletin said.

Assets like syndicated loans and commercial real estate — which have complex legal and regulatory frameworks and rely on highly manual procedures — might yield the biggest gains from being tokenised.

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Paradoxically, the assets that present themselves as the easiest to tokenize — those already traded on digital, mostly automated systems — would offer modest gains, the BIS said, before presenting the example of government bonds.

“Efforts in the realm of tokenisation should therefore concentrate on identifying assets that are suitable for tokenisation and traded in large volumes.”