28 September 2022

Commissioner McGuinness at Banque de France conference, “Opportunities and challenges of the tokenisation of finance: which role for Central

Tokenisation started as a challenge to the existing financial system. It emerged from a desire to disrupt. It was about bypassing the traditional financial system, seen by some as stacked against the man on the street.

You talked about trust in the very beginning in the very beginning of your speech, which I think is so, so important.

And I think your linking to the architecture at the end of your speech was very, very correct and well said.

One thing that I really want to emphasise, which you already have, is that regulation and innovation are not in conflict.

Because regulation and innovation should work hand in glove.

And if we take the broad example of the single market.

By legislating and regulating at a European level, we enable a new business to start up in a Member State but easily expand to another; or indeed a financial institution authorised in one country to finance a company based in another.

So rules and regulations underpin a single market that offers both opportunity and security to consumers and businesses.

In contrast, the area of tokenisation has often been described, and you will know this, as a Wild West – a lawless place, full of risks and dangers.

And I have to say that those lawless days are coming to a close.

By bringing in rules we want to guard against those risks and dangers – while allowing us to harness the possible benefits.

So today I want to address what tokenisation might mean for the financial system; how we are responding to these changes with regulation; and how the public sector, and in particular central banks, might complement what we are seeing in the private sector.

So firstly the challenges and opportunities.

Tokenisation started as a challenge to the existing financial system.

It emerged from a desire to disrupt.

It was about bypassing the traditional financial system, seen by some as stacked against the man on the street.

And I think it is no coincidence that the Bitcoin network started operating in 2009, against the backdrop, if you like, of the financial crisis, and the distrust of financial institutions that resulted from that crisis.

It is also perhaps no surprise that crypto markets have exploded since.

Crypto markets, as you know, are extremely volatile – but overall they have expanded to a global market capitalisation of around 1 trillion euro.

And behind all of this is blockchain technology.

This technology does have potential.

It cuts out the middleman – removing the need for centralised processes and intermediaries.

It can make transactions more efficient and transparent, by recording key information in an unchangeable format, making it accessible to all market participants.

And this could make payments cheaper, faster and safer.

This technology could also unlock the billions of euros and dollars currently used to cover credit or settlement risk in the financial system.

But these potential benefits cannot emerge in a Wild West scenario.

Without regulation, crypto poses big risks for the system, for our financial system.

Crypto markets are growing in size and popularity, so we need to think about their systemic risk.

In February this year, the Financial Stability Board warned that crypto markets have the potential to grow into a threat to global financial stability.

And we need to take those warnings very seriously.

And even if crypto markets do not yet present systemic risks, they already present many other risks.

Earlier this year, a number of larger crypto projects collapsed – including supposedly stable stablecoins – laying bare the lack of supervision.

We know that consumers risk buying into unsuitable products, because they are often lured in by a false promise of value going up and up and up.

Investors risk losing money because of crypto's volatility, and we know many have.

They can also lose through deception and/or fraud.

The Financial Times recently reported about the boom of crypto fraud alongside the boom of crypto markets during the pandemic.

Commission

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