The report focuses on technologies that may reduce or eliminate the need for intermediaries or centralised processes that have traditionally been involved in providing financial services.

According to the FSB, such decentralisation generally takes one of three broad forms: the decentralisation of decision-making, risk-taking and/or record-keeping.

These decentralised technologies could be applied in a number of areas, including cross-border payments and settlements, the tokenisation of securities, trade finance and insurance and peer-to-peer lending.

The report notes that the applications of decentralised financial technologies could bring financial stability, as well as lead to greater competition and diversity in the financial system and reduce the systemic importance of some existing entities.

However, the use of decentralised technologies may present risks to financial stability, including the emergence of concentrations in the ownership and operation of key infrastructure and technology, as well as a possible greater degree of procyclicality in decentralised risk-taking.

"New uncertainties concerning the determination of legal liability and consumer protection may also affect public trust in the financial system. Recovery and resolution of decentralised structures may be more difficult," the report said.

These issues may create challenges for financial regulatory and supervisory frameworks.

A more decentralised financial system may reinforce the importance of an activity-based approach to regulation, particularly where it delivers financial services that are difficult to link to specific entities and/or jurisdictions.

Certain technologies may also challenge the technology-neutral approach to regulation taken by some authorities.

The FSB said that these concerns could continue to be the subject of further consideration by authorities, and the latter may also want to engage in further dialogue with more stakeholders, including those in the technology sector that have had limited interaction with financial regulators to date.

"This should help avoid the emergence of unforeseen complications in the design of decentralised financial technologies at a later stage," the FSB said.

Pros and cons of tokenisation

The report defines tokenisation as "the representation of traditional assets… on [distributed ledger technology/DLT]".

According to the FSB, some of its benefits include: 

• enabling companies to issue securities that could be traded with a broad investor base without the involvement of a traditional financial intermediary, which could shorter custody chains typically involved in traditional securities holdings;
• online offerings of tokenised securities could increase firms' access to funding and create investment opportunities;
• the liquidity of certain assets could also be improved by "making them fractionalised and thus more easily tradeable";
• the speed with which transactions settle could be increased;
• cumbersome back office processes could be streamline;
• counterparty and operational risks could be reduced.

However, the report also lists potential negative implications.

For example, the use of DLT could result in new forms of concentration and cyber risks, including in respect of miners or validating nodes, on which the completion of transactions depends.

Further, if tokenisation were adopted more broadly, it might create "an appearance of liquidity in assets that are inherently illiquid".

"This may also have negative implications for financial stability. In particular, risks could arise where there is a liquidity mismatch between the token and the underlying asset, or where investors have limited understanding of products packaged into a token. For example, the tokenisation of real estate (were it to become widespread over a large geographic area) might threaten investor confidence in certain areas were investors to overestimate the degree to which the underlying assets could be sold at (or close to) prevailing market prices during periods of stress," the report noted.

Regulators should therefore continue to assess whether current rules provide adequate safeguards in the case of tokenisation.

Issuers of tokenised securities should also consider applicable regulation, including around settlement and settlement finality and the role of miners and validating nodes; the safekeeping of private keys and the interactions with the existing custody/safekeeping rules; and the security of the underlying DLT protocol and codes, including in relation to smart contracts.

"To the extent that tokenisation widens the potential investor base for a variety of products, effective application of investor protection rules may similarly require careful consideration," the report said.

Tokenisation may also raise other legal issues, including the role and liabilities of the party originating the tokenisation and the existence of a legal claim on the underlying asset for investors.

Finally, the shift towards smart contracts and self-executing code could also create specific governance and accountability issues, such as the question of whether – and to what extent – software developers, system operators or users can be held responsible if contracts do not function as intended.

The report was delivered to G20 Finance Ministers and Central Bank Governors for their meeting in Japan on 8-9 June, which includes a high-level seminar on financial innovation.