The International Organization of Securities Commissions (IOSCO), a global securities regulator, released a 73-page in-depth report this week (11th) entitled "Tokenization of Financial Assets," exploring the potential and risks of this technology .
The following analysis of the report's key points will help you understand its main points ( view the original report ).
Key Diagnosis: A Gradual Evolution with Much Talk but Little Action
Market narratives are always passionate, but IOSCO's data is cold and hard. The report shatters the immediate illusion of "everything can be tokenized," revealing the harsh reality of the initial stages:
Despite widespread interest from financial institutions (the FTF survey showed almost equal levels of interest), a survey by IOSCO's Financial Technology Task Force (FTF) revealed that when it comes to commercial applications with real money, a staggering 91% of the surveyed jurisdictions are still at a "zero or very limited" stage.
Evolution, not revolution: the essence of this transformation is "gradual" and "incremental." So-called tokenization, at many key stages of its lifecycle, still heavily relies on traditional financial infrastructure and intermediaries. This isn't a complete overhaul; it's more like replacing parts on a still-functioning Boeing 747 engine—careful and full of compromises.
Beachhead: Why bonds and MMFs?
Not all assets are created equal.
Silicon Valley dreams of tokenized stocks and real estate, but Wall Street's blade always cuts where the most blood (profit) is most likely to be drawn.
Fixed Income (Bonds): This is currently the most active testing ground. The reason is simple: the back-office processes of the traditional bond market, from issuance and registration to settlement, remain stuck in the last century in many ways. It is filled with isolated databases, cumbersome manual processes, and lengthy settlement cycles. Tokenization is seen as a panacea, promising to significantly reduce issuance time and costs.
Money Market Funds (MMFs): This is another area of explosive growth. The entry of giants like BlackRock and Franklin Templeton indicates that this is not just an experiment. Their motivations are far more profound: not only to improve the creation and redemption efficiency of MMFs themselves, but also because they see the huge potential of MMFs as "high-quality collateral."
Equities: The report is blunt about this: the market for equity tokenization "remains very limited." This is because existing public stock markets in developed countries are already "highly efficient." This surgery doesn't need to be performed here yet.
Divide the life cycle
A highly unbalanced operation: When we use a scalpel to dissect the complete lifecycle of an asset, the impact of tokenization becomes extremely uneven.
Issuance and Sales : The process has evolved, but the core roles—issuance agents, underwriting banks, and law firms—remain. They've simply replaced their document counters with DLT platforms; the essential work hasn't disappeared. For example, UBS's digital bond issuance process remains "basically unchanged" from traditional practices.
Transaction and clearing : This is the most awkward part, and also the part that best reflects "compromise".
Trading : The impact is very limited. Most tokenized securities remain listed on traditional exchanges (such as UBS bonds, which are dual-listed on both the SDX and SIX Swiss Exchange), or face severe liquidity fragmentation issues.
Clearing : This is the core promise of DLT. Atomic Settlement (T+0) is expected, but the report finds a highly ironic phenomenon: when given a choice, market participants still seem to prefer using traditional T+2 settlement infrastructure. The reasons behind this are complex: unfamiliarity with DLT infrastructure, fear of the inherent risks of digitalization (operational or network-related), and the powerful, seemingly unshakeable network effects of traditional clearing systems such as SIX SIS.
Asset servicing:
Custody : It enables digital escrow, but it also opens Pandora's box—the legal definition of private key management and ownership.
Collateral Management : This is perhaps the most substantial progress to date. DLT has significantly improved the liquidity of collateral, and JP Morgan's Kinexys platform has even enabled "intraday repo transactions," which is almost unimaginable in traditional systems.
The three fatal "Achilles' heels":
The truly valuable aspect of this report lies in its calm and insightful analysis of the potential "rejection reaction" and "infection risk" inherent in this "grafting" experiment.
A. The Ghost of the Law:
Who truly holds the "golden record"? This is almost the "original sin" of all tokenized projects. Traditional finance took centuries to establish a clear legal framework to define "ownership." But the emergence of DLT has shattered this consensus.
On-chain vs. Off-chain: When token records on the blockchain conflict with the ledgers of traditional central custodians or transfer agents (off-chain), which one is the legally valid "golden record"?
- BlackRock has acknowledged that its off-chain securitize records are the legally valid ownership records. On-chain records are more like efficient "copies."
- Franklin Templeton (BENJI) adopts a hybrid model, claiming that the blockchain is "an integral part" of the main record, but the transfer agent retains ultimate control.
- Switzerland (SDX): Relying on its status as a regulated CSD and the support of the Swiss DLT Act, its DLT ledger is the main legally binding registry.
B. Infrastructure Vulnerability
The risks of mounting trillions of dollars of financial assets on DLT are unique and fatal:
Smart contract risks: Code is law, but code can also be riddled with bugs. On an immutable ledger, a single error can lead to catastrophic and irreversible losses.
For example, in Layer 2 solutions, when is a transaction considered "truly complete"? Is it confirmed on the L2 network or anchored on the L1 mainnet? The report astutely points out the significant legal risks arising from this ambiguity.
The report also mentions private key risks: in the traditional world, you can reset your password; in the crypto world, you may lose everything (although the report notes that registered security tokens can be reissued by the issuer).
C. The absence of the Holy Grail:
Reliable on-chain settlement assets are the biggest bottleneck to scalability. You can easily transfer tokenized bonds on-chain, but what do you use to pay for the transaction?
Lack of reliable payment instruments: To achieve true DvP (delivery versus payment), you need an on-chain settlement asset with no credit risk and high liquidity.
Options and their drawbacks:
Central Bank Digital Currency (wCBDC): This is the ideal "holy grail," but central banks around the world are still slowly piloting it.
Tokenized Deposits: Feasible, but face serious market fragmentation risks, with each bank having its own standards and private blockchains.
Stablecoins: They possess the strongest market momentum, but also carry the greatest risk. The report expresses high concern, pointing to their lack of adequate auditing and reserve transparency, as well as inherent price volatility and counterparty risk.
Regulator's Response
Navigating a New World with Old Maps: Faced with this new species, global regulatory agencies did not invent a completely new set of laws, but instead unanimously chose the core principle of "technology neutrality." Their logic was: "Same activities, same risks, same regulatory outcomes."
The official response was a series of combined measures:
Applying the existing framework: Most jurisdictions directly classify tokenized products under existing securities regulations.
Issuing specific guidance : Clarifying how existing rules apply to new risks, such as the circular issued by the Hong Kong Securities and Futures Commission (SFC).
Regulatory sandboxes : Allowing experimentation in a controlled environment is the most pragmatic approach, such as the EU's DLT Pilot Regime and the UK's Digital Securities Sandbox (DSS).
Revising laws : A few pioneers (such as Switzerland, Germany, Italy, and Spain) have begun revising existing laws to provide a clear legal basis for "digital securities" or "DLT registration".
Final warning: The specter of "risk contagion"
The report concludes that the integration process is still in its very early stages. Traditional financial structures (such as CSD) and emerging DLT facilities will coexist for a long time to come.
However, the report astutely captures a key emerging threat: the "risk contagion" between traditional finance (TradFi) and crypto assets (Crypto).
The report explicitly states that tokenized MMFs (such as BlackRock's BUIDL) are increasingly being used as reserve assets for "stablecoins" or as collateral for crypto-related derivative transactions.
This means that the once clearly defined firewall is beginning to be breached. Shocks from the highly volatile crypto market (such as the decoupling of stablecoins) could very well be transmitted directly to the heart of traditional finance through these "grafted" tokenized assets in the future.
This is the most significant potential shift in this experiment that will keep global regulators up all night.
