FSB Warns of Growing Financial Stability Risks as Tokenization Adoption Rises

Global financial regulators are sounding the alarm on the potential risks of asset tokenization, despite its currently limited scale. In a comprehensive report released today to G20 Finance Ministers and Central Bank Governors, the Financial Stability Board (FSB) highlighted several vulnerabilities that could emerge as the technology gains wider adoption.

While tokenization – the process of representing assets digitally using distributed ledger technology (DLT) – currently poses no material risk to financial stability due to its small scale, the FSB identified several key concerns that could surface as the technology scales up. These include liquidity and maturity mismatches, excessive leverage, asset quality issues, and operational vulnerabilities.

“Tokenisation could have implications for financial stability if it scales up significantly,” warned FSB Chair Klaas Knot in his letter to G20 officials. The report particularly emphasized risks related to three key areas: the underlying reference assets being tokenized, the participants involved in DLT-based projects, and the interaction between new technology and legacy systems.

The FSB’s analysis revealed that while tokenization may offer benefits such as improved efficiency and increased transparency in financial markets, many of these advantages remain unproven. The report noted that some benefits might not be uniquely achievable through tokenization and could involve trade-offs that potentially negate the advantages.

Several factors currently limit the growth of tokenization, including:

• Unclear investor demand
• Lack of interoperability between DLT platforms and traditional financial infrastructure
• Limited availability of settlement assets
• Varying legal and regulatory frameworks across jurisdictions

In response to these challenges, the FSB recommended that authorities focus on addressing data gaps in monitoring tokenization adoption and develop a better understanding of how these new technologies fit within existing regulatory frameworks. The board also emphasized the importance of enhanced cross-border regulatory cooperation and information sharing.

The report comes as financial institutions worldwide are increasingly exploring tokenization projects, despite the current low adoption rates. The FSB’s warnings suggest that while innovation in this space continues, regulators are keen to ensure that proper oversight mechanisms are in place before the technology achieves significant scale.