Step Aside ‘Blockchain Technology’, IMF and BIS Have a New Crypto Buzzword

Financial stewards including the International Monetary Fund and Bank for International Settlements say tokenization is the future. They’re wrong.

AccessTimeIconJun 26, 2023 at 5:19 p.m. UTC
Updated Jun 26, 2023 at 5:32 p.m. UTC
AccessTimeIconJun 26, 2023 at 5:19 p.m. UTCUpdated Jun 26, 2023 at 5:32 p.m. UTC
AccessTimeIconJun 26, 2023 at 5:19 p.m. UTCUpdated Jun 26, 2023 at 5:32 p.m. UTC

Last week the International Monetary Fund (IMF) – a United Nations organization that effectively operates as a global lender of last resort – and the Bank for International Settlements (BIS) – a super-governmental central banking agency – published separate reports about the future of the monetary system. Both reports mentioned crypto and central bank digital currencies (CBDCs) and were generally positive about the potential for tokenization.

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It’s not just the big governmental organizations either. Earlier this year the head of JPMorgan’s digital assets platform said “tokenization is a killer app for traditional finance,” Goldman Sachs said it was examining the “tokenization of real assets” and a recent research report published by financial firm Bernstein asserted that “tokenization could be a $5 trillion opportunity.”

Even CoinDesk’s Chief Content Officer Michael Casey wrote in March how technology has migrated the tokenization of real-world assets from “closed, permissioned projects onto public, permissionless blockchain platforms” and suggested that, yes, this time might be different. (Also, it’s me, hi, I’m the longer-serving colleague mentioned in Casey’s piece who rolled his eyes at the idea that tokenization of real-world assets is viable).

In any event, the IMF and BIS reports provide an interesting insight into how the bureaucrats view crypto because they both coalesce around the idea that tokenization is the killer application for crypto.

The BIS wrote: “Today, the monetary system stands at the cusp of another major leap. Following dematerialisation and digitalisation, the key development is tokenisation – the process of representing claims digitally on a programmable platform.”

Parsing this quickly, dematerialization and digitalization have both happened and have worked wonders for the world economy and commerce. Dematerialization, as in, banks keeping records on ledger entries rather than requiring the movement of physical currency with every transaction and digitization, as in, when that ledger entry practice moved from paper to digital. Tokenization, meanwhile, is the forward-looking idea that is “the process of representing claims digitally on a programmable platform,” to use the BIS’ words.

Okay, one more time, but this time slower.

Tokenization is the process … of representing claims … digitally … on a programmable platform.

Hold on. Is this anything?

Digitization of the monetary system is clearly the digital representation of financial claims. Does that mean financial technology companies, which often operate programmable platforms, is the next leap? Is that tokenization?

Well, no. Tokenization, in the eyes of the IMF and the BIS, is the practice in which claims are traded on programmable platforms. If a blockchain is involved, those claims will likely be represented as tokens. Tokens are not just digital entries in a database. Rather, they integrate the records of the underlying asset normally found in a traditional database with the rules and logic governing the transfer process for that asset.

For a homebuyer, tokenization might mean that their deed is represented as a token on a blockchain like Bitcoin or Ethereum. Instead of a deed transfer signaling who the homeowner is, it’ll come from the transfer of a token.

Admittedly, tokenized real estate today stands on shaky foundations. Sure, the “rules and logic governing the transfer process for that asset” could exist on a token platform, but the exact moment a legal document or legal proceeding governs some aspect of ownership then you invalidate the entire use case for a token representing that piece of real estate.

Given the actual contents of the IMF’s and BIS’ reports, it appears institutions are less focused on the tokenization of commodities or real estate and are far more interested in the tokenization of central bank digital currencies.

Doing a what to a what-now?

First off, CBDCs deserve wider contemplation than will be offered here, but let’s focus on taking on CBDCs strictly from the lens of tokenization. The best way to summarize where central banking institutions stand on tokenization of CBDCs is to just share a quote directly from the IMF report:

To make a payment, participating banks deposit reserves in this escrow account and the platform creates a digital certificate of escrow for the bank to transfer on the ledger among other participants. In the simplest case, the recipient bank would receive a tokenized reserve from the sender’s bank and would credit the recipient’s account in parallel. The recipient’s bank could then sell the tokenized reserves to any other participant on the platform in exchange for domestic reserves. Many other operations beyond simple settlement are possible…

The central idea connecting the IMF’s and BIS’ reports on tokenizing CBDCs is the existence of some single or unified ledger. So distrustful are these organizations of non-central bank money (of course they are) that they must create a centralizing force to ensure the stability of settlement and “singleness of money.”

The BIS defines this unified ledger as “a ‘common venue’ where money and other tokenised objects come together to enable seamless integration of transactions and to open the door to entirely new types of economic arrangement.”

Now we’re not sure what will come of these discussions and explorations and examinations into tokenization, if anything at all. Plenty of countries are researching CBDCs, but only a handful have implemented these systems.

One thing’s for sure: The technobabble is dizzying. If the IMF, BIS and organizations like them want to create a CBDC with a single, unified, centralized ledger they don’t need to pretend they’re using cryptocurrency to do it. Conflating things like Bitcoin and the tokenization of CBDCs is misguided. At best, it’s a misunderstood yearning for a more tech-enabled money system. At worst, it’s a treacherous, intentional distraction from what makes Bitcoin and crypto attractive – which aren’t attractive because they are digital, but because they lack central control. Exactly what the central banks and regulators are trying to insert.

Simply signaling innovation is not actually innovating. And tokenization is hardly an improvement over what financial institutions already do. It is a distraction. It is nothing.



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George Kaloudis

George Kaloudis was a research analyst and columnist for CoinDesk.