The Reserve Bank of Australia (RBA) has estimated that the benefits of tokenisation in Australia’s financial markets could result in billions of dollars of cost savings each year.
But a number of roadblocks are currently standing in the way of the transition to tokenised finance, according to the central bank, including regulatory uncertainty.
These issues were highlighted by RBA assistant governor (financial system) Brad Jones in a speech to the Australian Financial Review Cryptocurrency Summit on Monday.
“Tokenisation offers some intriguing possibilities, but is not without its challenges and more work is needed to understand how we could yield the benefits while managing the risks,” Mr Jones assessed.
Increased liquidity, informational transparency, and auditability were among the potential benefits of tokenisation identified by Mr Jones during his speech.
“More timely and complete information available in tokenised settings could help to complete markets and boost economic efficiency,” he explained.
Overall, Mr Jones said that a combination of better information, lower barriers to entry, fractional ownership, and the ability to transact and settle 24/7 could boost liquidity in markets and increase the scope for mutually beneficial trade.
The RBA assistant governor also pointed to reduced risks, costs, and improved capital efficiency stemming from shorter settlement cycles, along with reduced intermediary and compliance costs, as being further potential benefits of tokenisation.
In terms of the potential cost savings, the RBA estimated that tokenisation could hypothetically lead to $13 billion a year in cost of capital savings and between $1–4 billion a year in transaction cost savings within Australian financial markets.
Meanwhile, regulatory uncertainty and compliance obligations were raised by Mr Jones as being standout challenges for tokenisation.
“It is a perennial regulatory challenge to ensure innovation can flourish in a way that is consistent with financial stability and consumer protection. Some innovations in tokenised finance have occurred in a grey zone, on the edge of the regulatory perimeter,” he said.
Mr Jones noted that only a small number of jurisdictions have set up new regulatory frameworks supporting tokenised asset markets to date, while others have suggested that innovations in tokenised finance should operate within existing frameworks.
“In Australia, work on a regulatory framework for tokenised assets is being led by Treasury, with support from agencies comprising the Council of Financial Regulators,” he added.
Other challenges include interoperability, given that tokenised asset markets would need to be interoperable with traditional infrastructure “for the foreseeable future”.
“To sum up, we should be wide-eyed to these challenges. It’s very possible they can be overcome, but more work by policymakers and industry is needed,” Mr Jones stated.
Central bank digital currency
Following a year-long research project, the RBA and the Digital Finance Cooperative Research Centre (DFCRC) concluded in August that a decision on a central bank digital currency (CBDC) in Australia is “likely to be some years away”.
Mr Jones said the project highlighted a number of areas where a CBDC could add value, including by facilitating atomic settlement in tokenised asset markets.
Additionally, he indicated that the project highlighted opportunities for a wholesale CBDC to act as a complement to new forms of privately issued digital money, including tokenised bank deposits and asset-backed stablecoins.
“Our overarching position is that we remain open-minded as to the functional forms of digital money and supporting infrastructure that could best support the Australian economy in the future,” Mr Jones said.
“We have an active research program underway and are letting the evidence guide us.”
According to Mr Jones, the RBA is currently in the early stages of planning for a new project which will look at how different forms of digital money and infrastructure could support the development of tokenised asset markets in Australia.
The RBA and Treasury are also planning to publish a joint report by mid-next year providing a “stocktake” on CBDC research in Australia and setting out a roadmap for future work.
“The question of how we might arrange our monetary system to better support the Australian economy in the digital age is now a key priority for the bank,” Mr Jones concluded.
Also on Monday, the Albanese government announced that it will seek to leverage existing Australian financial services laws in its plan to regulate digital and crypto asset platforms.
