The Bank for International Settlements (BIS) has highlighted the potential benefits of tokenizing real-world assets (RWAs) on blockchain platforms, stating that this process could create stronger connections between the worlds of cryptocurrency and traditional finance (TradFi).
In a recent paper published by the BIS on the risks associated with cryptocurrencies, analysts emphasized that the tokenization of traditional assets on distributed ledgers is fostering a closer relationship between decentralized finance (DeFi) and TradFi. This trend could lead to a significant increase in the trading of assets within the DeFi ecosystem, ultimately blurring the lines between the two financial spheres.
According to the BIS, if this trend continues, DeFi infrastructure could become more mainstream, attracting a broader range of institutional participants. Decentralized exchanges (DEXs) and other DeFi-specific infrastructures may transition into mainstream financial operations, marking a significant shift in the financial landscape.
The BIS warns that as these connections between DeFi and TradFi deepen, it is crucial to conduct further research and establish regulatory frameworks to mitigate potential stability risks. The institution stresses the need to anticipate and address any potential “spillovers” that may arise from the integration of DeFi with traditional financial systems.
The BIS suggests that a deeper examination of the interaction between DeFi and TradFi is necessary, particularly in light of the tokenization of real-world assets and the increasing use of smart contracts in traditional finance. Research should also focus on understanding the systemic risks that may arise from the integration of DeFi with critical sectors such as banking and insurance.
Moreover, the role of stablecoins in supporting the growth of DeFi and the risks associated with their volatility should be thoroughly analyzed. It is essential to assess the stability of the DeFi ecosystem and potential spillover effects on traditional finance that could result from the use of stablecoins.
In conclusion, the BIS advocates for a comprehensive approach to studying the evolving relationship between DeFi and TradFi to ensure financial stability and mitigate potential risks. By addressing these issues proactively, regulators and policymakers can better prepare for the changing landscape of finance in the digital age.
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