The Bank for International Settlements (BIS) has issued a stark warning after data showed that tokenized money market funds, digital-asset versions of traditional short-term funds, have surged to nearly $9 billion in aggregate assets. According to a recent bulletin, the rapid growth of tokenized money market funds, from approximately $770 million at the end of 2023 to almost $9 billion now, has transformed these vehicles into a “key source of collateral” in the broader cryptocurrency ecosystem. The BIS warns that while tokenization offers the “flexibility of stablecoins,” it comes with material operational and liquidity risks . This warning has highlighted the need for individuals to identify these risks as they observe how market players and tech providers are working to address the possible challenges. The BIS warns of liquidity mismatch risk According to a reliable source, the BIS identified liquidity mismatch as the primary risk associated with tokenized money market funds. The organization argued that although one can cash out tokenized money market funds daily, their underlying assets follow standard settlement times , which is the next business day in the US. The BIS explained that such a situation is not considered a problem, but in difficult times, a significant number of redemption requests can demonstrate the mismatch. Following this remark, the organization noted that the market is new and solutions are being formulated. To support this claim, an example of a global financial technology provider, Broadridge, was cited, which developed the Distributed Ledger Repo (DLR), an intraday repo solution. This system enables the transfer of tokenized Treasuries on the same day. The DLR can also be utilized to tokenize and transfer Treasuries without involving repurchase agreements. Therefore, the BIS argued that when an MMF consists of Treasuries, the asset manager may sell Treasuries during the day rather than waiting until the next business day. The organization’s findings sparked concerns in the ecosystem. To address this controversy, it is noted that although this liquidity mismatch risk is currently present, it can be mitigated by the available technology. Meanwhile, regarding the BIS’s stablecoin report released earlier this year, sources highlighted that it issued a severe warning concerning the dangers of stablecoins, advising nations to shift towards digital versions of their currencies swiftly. Widely regarded as the central bank for central bankers, the BIS expressed concerns that stablecoins could pose a threat to a country’s ability to manage its currency, create transparency issues, and lead to capital flight from developing nations. IOSCO cautions against risks associated with tokenization This month, a global securities regulator, IOSCO, released a statement claiming that crypto tokens linked to popular financial assets might pose new risks for investors. The securities regulator identified this challenge at a time when the finance industry remains divided on the benefits of “tokenization.” IOSCO and the BIS collaborate to promote financial stability by creating joint working groups and reports. Concerning IOSCO’s claims, sources mentioned that tokenization, which involves the creation of blockchain-based tokens linked to real-world assets such as stocks or bonds, has regained popularity this year among cryptocurrency enthusiasts. This is partially because individuals can now purchase several new tokenized products through online brokers. The global regulator argued that, although existing rules already cover most risks associated with tokenization, new risks and weaknesses could emerge from the technology itself. “While usage is still low, tokenization could change how financial assets are issued, traded, and managed,” said Tuang Lee Lim, who heads IOSCO’s fintech taskforce. In the meantime, it is worth noting that the BIS announced a new leader for its Innovation Hub on Tuesday, November 25. The hub focuses on some of the major work around digital currencies, artificial intelligence, and other emerging technologies. According to the International Organisation, Tommaso Mancini-Griffoli, who is currently an Assistant Director at the International Monetary Fund (IMF), overseeing payments and currencies, will join the BIS in Switzerland beginning in March. Sign up to Bybit and start trading with $30,050 in welcome gifts
