Asset Tokenization in Financial Markets 2025

Contents53 7.2 Financial stability Due to its limited scale, tokenization currently poses a minimal risk to financial stability. However, as adoption grows, the Financial Stability Board (FSB) warns of vulnerabilities, including liquidity and maturity mismatches, leveraged rehypothecation, price and quality obscurity from smart contract composability, systemic concentration risks and operational fragilities stemming from multi- party collaboration.161Considerations 7.3 Regulatory developments A major barrier to large-scale tokenization remains the lack of regulatory clarity in digital asset markets. However, recent political and regulatory shifts suggest growing momentum towards a more defined framework. Institutional digital asset projects have often stalled due to uncertainty regarding the permissibility of on-chain products.162 One of the first regulatory frameworks that clarified the role of tokens and tokenization was in Luxembourg. Blockchain Law I (2019) recognized DLT as a valid system for securities registration and enforceable book transfers. Blockchain Law II (2021) permitted DLT-based securities issuance accounts. Blockchain Law III (2023) confirmed that DLT-held securities qualify as financial assets under collateral regulations, aligning with the EU’s DLT Pilot Regime. Liechtenstein enacted the Token and Trusted Technology Service Provider Act (TVTG) in 2020. This legislation provides a comprehensive and technology-neutral approach to regulating the token economy, addressing civil and supervisory aspects. By defining tokens as containers of rights, the TVTG enhances regulatory clarity.163CONTROLLING THE LIMITLESS NATURE OF COMPOSABILITY Use composability in a manner congruent with safety and soundness and embed controls to prevent the limitless creation of wrapped assets per the asset’s risk profile and the risk tolerance of relevant parties, such as with the application in increasing the velocity of collateral through reuse across multiple trading steps. GOVERNING MULTISTAKEHOLDER PROCESSES Coordinate rules and governance frameworks across all participating parties while relying on a neutral third party to mediate disputes or challenges. EMBEDDING SMART CONTRACT AUDIT PROCEDURES Apply rigorous testing procedures associated with smart contract development using open-source frameworks and testing tools to minimize risks associated with asset composability. The FSB highlights several strategies to encourage safe adoption: EXPLORING NATIVELY ISSUED TOKENS Explore using natively issued tokenized assets compared to reference asset models to minimize challenges associated with liquidity and maturity mismatch, driven by managing dual liquidity pools (token and underlying asset). Firms should embrace cash on-chain to mitigate maturity mismatch and ensure standard settlement windows. MITIGATING CONCENTRATION AND CONTAGION RISKS Promote competition by making markets accessible to smaller players and carefully distributing market powers, balance sheets and liquidity.