Global Securities Supervisor Warns New Risks Of 'Tokenization' Financial Assets

Tuang Lee Lim, Head of the IOSCO Fintech Task Force. (photo: @FINTECHCircle)

JAKARTA Crypto tokens connected to mainstream financial assets can create new risks for investors, IOSCO's global securities watchdog said in a report on Tuesday, November 11. This warning comes amid debates in the financial industry about the benefits and dangers of the tokenization phenomenon.

Tokenization is a blockchain-based token manufacturing process that represents real-world assets such as stocks, bonds, or property. This trend has again attracted the attention of crypto enthusiasts this year, with more and more tokenization products being sold to the public through online brokers.

The IOSCO (International Organization of Securities Commissions), which consists of almost all world capital market regulators, states that most of the risks of tokenization can still be regulated through existing legal frameworks. However, they also warned of the emergence of new risks stemming from the basic blockchain technology itself.

"Although adoption is still limited, tokenization has the potential to change the way it is issued, trade, and management of financial assets," said Tuang Lee Lim, Head of the IOSCO Fintech Task Force.

IOSCO added that various ways of compiling tokenization assets can create confusion for investors, especially regarding whether they really have their basic assets or just their digital tokens. In addition, the involvement of third parties as token publishers also increases the risk of opponents (counterparty risk) Similar concerns have also been voiced by EU securities regulators last September.

IOSCO also warned of the possibility of an 'excessive effect' (spill-over) from the link between crypto asset markets and tokenization assets, which could expand the impact of systemic risk.

Several large financial institutions such as Nasdaq have begun to encourage the implementation of tokenization, while some of the other Wall Street players remain cautious about the potential risks.

IOSCO notes that although commercial interest in tokenization increases, the actual implementation is still relatively "constrained."

Supporters of tokenization claim that blockchain technology can reduce transaction costs, accelerate trade settlement, allow 24-hour transactions, and even attract young investors.

However, the IOSCO report confirms that the efficiency gain is still not evenly distributed, because market participants still have to use traditional financial infrastructure in the trading process, instead of completely replacing it with a blockchain-based system.