IOSCO highlights risks of tokenisation

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The report, IOSCO’s final one on the tokenisation of financial assets, takes a cautious approach to its assessment of the market and the risks involved. While accepting that tokenisation may “enhance efficiency and transparency”, it also “introduces new risk or amplifies existing ones that regulators must understand and address to protect investors”, states the report. 

These risks include a lack of legal certainty, operational vulnerabilities and cyber risks. While these are exisitng risks categories, they manifest differently within a DLT environment and therefore require tailored risk controls, according to the global securities regulator.

The report also highlights interoperability challenges and a lack of credible settlement assets as further barriers to wider adoption.

Efficiency gains are also described as “uneven” for different participants, especially those that still rely on traditional infrastructure for trading and post-trade processes.

Regulatory approaches to date are also too varied, according to IOSCO, with different members employing different strategies – some are applying exisiting frameworks, while others ahave issued new guidance or launched sandboxes specifically for tokenisation. 

According to IOSCO, which serves as the collective organisation for securities regulators, its members should adopt the “same activities, same risks, same regulatory outcomes” principle and consider applying the organisation’s Policy Recommendations for Crypto and Digital Asset Markets and Policy Recommendations for Decentralized Finance in the context of tokenized financial assets.

“Although adoption remains limited, tokenization has the potential to reshape how financial assets are issued, traded, and serviced,” said Tuang Lee Lim, chair of IOSCO’s board-level fintech task force. 

“Members developing regulatory approaches for tokenized financial assets would find it useful to refer to the Policy Recommendations for Crypto and Digital Asset Markets and the Policy Recommendations for Decentralized Finance.”