The Bank for International Settlements (BIS) said crypto and DeFi have highlighted “tokenization’s promise,” but ultimately, crypto is a “flawed system” that cannot become the “future of money.”

The global watchdog made the statement in its 2023 Annual Economic Report published on June 20, which claimed that the global financial system is on the verge of its next “major leap” — akin to humans shifting from gold to paper.

According to the BIS, crypto inherently lacks the trust that money needs — which only central banks can provide. The watchdog said:

“Not only is crypto self-referential, with little contact with the real world, it also lacks the anchor of the trust in money provided by the central bank.”

The regulator added that stablecoins are essentially “mimicking central bank money” to try and fill this “vacuum” of trust in the industry, but they are “no substitute for the real thing.”

High-profile scandals in the industry that caused the recent “implosion of the crypto world” prove that it cannot become the foundation of the global economic system, and there is a pressing need for central bank digital currencies (CBDC), according to the report.

The watchdog said that a financial system built on tokenization needs both wholesale and retail CBDCs. Wholesale CBDCs would essentially serve the same role as reserves in the current financial system, while retail CBDCs would function as a digital version of cash that can be used for daily transactions.

The BIS said that tokenization would likely play a key role in the foundation of the future financial system due to its benefits, as it can eliminate many of the issues present in the current financial system, such as transactions being reconciled separately before final settlement.

Tokenization efforts in the private sector have been going poorly because these projects often create “silos” that cut them off from other parts of the financial system. This shows that the private sector is unable to create the infrastructure of the future financial system, according to the report.

The BIS said:

“The collapse of crypto and the faltering progress of other tokenization projects underline a key lesson. The success of tokenization rests on the foundation of trust provided by central bank money and its capacity to knit together key elements of the financial system.”

The watchdog urged both the public and the private sectors to come together and collaborate wholeheartedly to build the future financial system.

The post BIS says crypto is a ‘flawed system’ but tokenization could underpin future financial system appeared first on CryptoSlate.

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