February 23, 2024

In a new report, the Bank for International Settlements said it approved the tokenization of assets, released a blueprint for a global “unified ledger,” but described encryption as a “flawed system.”

The Bank for International Settlements on Tuesday unveiled plans for a global “unified ledger” that will underpin central bank digital currencies (CBDCs) and tokenized assets.Bank for International Settlements, a central bank considered a central bank Report He detailed the future of monetary systems known as tokenization, or the conversion of money and other assets into digital tokens that can be traded on programmable platforms, saying it brought about a “major leap forward” for the financial system.

While advocating centralized options, the BIS has described decentralized cryptocurrencies as “flawed systems.” Furthermore, the report states:

Cryptocurrencies and decentralized finance (DeFi) have offered glimpses into the promise of tokenization, but cryptocurrencies are a flawed system that cannot bear the mantle of money of the future.

The BIS went a step further by arguing that “cryptocurrencies are broken,” saying that the successful use of tokenization relies on trust provided by central banks.

The collapse of cryptocurrencies and the faltering of other tokenization projects have highlighted an important lesson: the success of tokenization depends on the foundation of trust provided by central bank money and its ability to hold together key elements of the financial system.

Tokenization is the ‘next logical step’

The bank further asserted that tokenization is the “next logical step” for asset transfers and digital record keeping. it says:

Tokenization can significantly enhance the capabilities of monetary and financial systems by leveraging new ways for intermediaries to interact in serving end users, eliminating the traditional separation of messaging, reconciliation, and settlement.

BIS identifies smart contracts as important use case for unified ledger

In making the case for a unified ledger, BIS identified its potential use cases. The bank identified smart contracts that could open the door to new types of “arrangements and transactions” that “can expand the range of possible contractual outcomes”.

The report outlines how smart contracts can overcome coordination problems that often arise in joint ventures. It states that blockchain technology can increase the stability of bank funds and eliminate free-riding.

A smart contract could stipulate that each participant only contributes a certain amount to the joint venture if all other participants also contribute, thus eliminating free riding.

Disclaimer: This article is for informational purposes only. It does not provide or be intended to be used as legal, tax, investment, financial or other advice.