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According to a new report published by the Bank for International Settlements (BIS), the tokenization of real assets on the blockchain could strengthen the ties between decentralized finance (DeFi) and traditional finance. The report suggests that this development may pose potential risks to financial stability and could lead to uncertain connections between existing systems and new infrastructures.
Tokenization and DeFi
BIS experts state that representing traditional assets on the blockchain may facilitate increased participation from institutions in the DeFi space. As a result, the number of assets traded on decentralized platforms could rise, potentially leading to the emergence of new applications beyond current trends.
The report notes that if the tokenization of real assets becomes widespread in the financial system, the DeFi infrastructure will likely integrate more with traditional systems, necessitating regulatory oversight. BIS highlights that systemic risks may increase, particularly in critical sectors such as banking and insurance, emphasizing the need for more in-depth research.
BIS representative stated, “With the evolution of the DeFi ecosystem, tokenization, the use of smart contracts, and digital intermediation may increase systemic risks and lead to changes in regulatory approaches.”
The integration of new technologies and financial tools may cause structures to evolve in unpredictable ways. BIS stresses that comprehensive studies in this field will be effective in maintaining financial stability and underscores the importance of revising regulatory frameworks.
The Future of Cryptocurrency
The report suggests that in the future, the unique structure of decentralized finance might lag behind, indicating that institutions and infrastructures may need to adapt to this transformation sooner rather than later. It emphasizes that aligning existing regulations with new technologies could play a critical role in financial stability.
BIS official remarked, “A much broader range of institutions can participate, and DeFi-specific infrastructures can integrate into the traditional system.”
Additionally, the report mentions observations suggesting that one reason for the banking stress experienced in March 2023 may have been indirect exposure to large cryptocurrency investors. This issue had drawn the attention of some policymakers and regulators at that time. Democrats, facing criticism for unfairly blaming cryptocurrency, adopted a more hostile stance, which could have cost them the 2024 elections. While federal management failed to ensure the safety of banks, the collapse of certain banks was unjustly linked to their crypto-focused clientele. Those banks had taken on excessive risks and collapsed due to losses from liquidating bonds at discounted prices amid rapid Fed interest rate hikes.
In light of current developments, it is anticipated that both traditional financial institutions and decentralized finance will undergo a process of alignment regarding infrastructures and regulations. If studies continue to progress, uncertainties regarding the future of the sector are expected to diminish, giving rise to new opportunities.
