New York Fed experts talk up tokenization? šŖ
Yesterday two experts from the New York Federal Reserve published a post entitled āTokenization: Another giant leap for securities?ā It explains tokenization and argues central bank involvement helps with an orderly transition of financial infrastructure. The paper doesnāt support tokenization without reservation, as highlighted by the question mark in the title and the observation that the āfinancial industry may again be on the cusp of profound technological change.ā (Emphasis added.)
Specifically, the authors are with the NY Fedās New York Innovation Center (NYIC). The NYIC is involved with Project AgorĆ”, the BIS initiative exploring the use of wholesale CBDCs from seven central banks to improve cross border payments via correspondent banking. Itās also a ātechnical observerā to the latest Regulated Settlement Network tests. Both projects involve tokenization.
The authors explore the disorderly transition of Wall Street from paper to computers during the late sixties, with back offices unable to cope with the paperwork generated by surging trading volumes. Thatās in contrast to the 2002 orderly launch of CLS, the foreign exchange central counterparty that removes significant risk from the FX market. Central banks pushed for CLS. Additionally, CLS has access to central bank money, which reduces credit and liquidity risks.
For central bankers, the appeal of tokenization is the risk reduction from atomic settlement, or in traditional finance terminology, payment versus payment (PvP) for FX and delivery versus payment (DvP) for securities.
āA tokenized system without both of these features (atomic settlement and central bank money) may not be as robust as existing systems,ā the authors wrote.
Sidestepping the CBDC minefield
One observation is the discussion of tokenization and central bank money but no references to CBDC. Thatās despite a wholesale CBDC theoretically being non-contentious, since it avoids the privacy and control concerns triggered by a retail CBDC. There is the question of whether a wholesale CBDC requires Congressional approval. Some Bills floated by regulators have failed to distinguish between the two. Hence, itās understandable that the controversial topic is sidestepped.
We noted the mention of using DLT for tokenization, as if itās a foregone conclusion. That contrasts with another U.S. regulator, the Comptroller of the Currency, who is bullish on tokenization, but significantly less keen on DLT. The BIS has taken a technologically neutral stance, particularly in discussions about AgorĆ”. Scalability and performance are common concerns.
Still, if the New York Fed is publishing articles about tokenization, thatās likely a good sign.
https://www.ledgerinsights.com/new-york-fed-experts-talk-up-tokenization