The Bank for International Settlements (BIS) says that the tokenization of Real-World assets (RWAS) will develop stronger connections between crypto and traditional finances (Trandfi) on Blockchain’s stronger connections.
In a new article about the financial stability risks of Crypto, BIS analysts say that RWAS – or the tokenization of traditional assets on distributed grandbooks – create an increased connection between tradfi and decentralized finances (Defi).
If the trend continues, the BIS says that more and more assets will be traded in the Defi-Ecosystem, to the point that “the self-referential nature of Defi will become a characteristic of the past.”
Such a development would probably make Defi infrastructure much more mainstream than today, says BIS.
“A much larger set of settings could start participating and a number of infrastructures that are currently specific to Defi, such as Dexs (decentralized trade fairs), will become part of the mainstream.
As a result of these changes, the existing connections will not only grow in size, but they will also evolve in ways that are difficult to predict. There may already be connections in areas that are not immediately clear. For example, the drivers of the Bank stress of March 2023 are difficult to locate. But the indirect exposure of American banks to deposits with large interests in cryptom markets was a contributing factor that surprises many policy makers and supervisors. “
The International Financial Institution calls for more research and a deeper view of the regulation of the relationship between Defi and Tradfi to suppress potential stability risks in the case of ‘overflow’.
“As the Defi-eco system continues to evolve, different areas justify a deeper exploration. First, the interaction between Defi and Tradfi needs more attention, especially as a tokenization of real-world assets, the use of smart contracts in traditions and new forms of digital mediation.
Research could focus on understanding the potential systemic risks if Defi is more integrated with TradeFi, in particular in critical sectors such as banking and insurance. Secondly, the role of stablecoins in supporting the growth of Defi and the risks of their instability requires further analysis, which includes both the stability of the Defi Ecosystem itself and its potential overflow with Tradfi. “
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