[Full Text] Bank of Korea Vice Governor: "Tokenization Cannot Only Focus on Efficiency... We Must Prepare for New Vulnerabilities"

Kwon Min-soo, Vice Governor of the Bank of Korea, emphasized that while the tokenization of financial assets can significantly enhance the efficiency of trading, clearing, and settlement, it is also necessary to prepare for the potential new vulnerabilities to financial stability.

During the opening remarks at the presentation of the International Monetary Fund (IMF) Global Financial Stability Report (GFSR) titled 'Scaling Tokenization: New Efficiencies, New Vulnerabilities', Vice Governor Kwon stated, "By embedding transaction conditions and execution rules in the ledger, we can perform multiple stages of trading, clearing, and settlement simultaneously, and we are at a turning point where financial infrastructure can make a significant leap forward."

Vice Governor Kwon noted that particularly in Asia, the benefits of rapid settlement and reduced intermediation costs through tokenization could be substantial, but it is also important to consider that the 'friction' in existing financial markets has historically acted as a buffer during times of market instability.

He stated, "Limited trading hours, multiple intermediaries, and settlement processes that can take days have hindered efficiency, but during times of market turmoil, they have also provided policymakers with time to assess and respond to the situation, and as tokenization spreads, the room for such post-hoc responses may decrease."

He also mentioned the roadmap for issuing token securities in Korea, the expansion of 'Project Han River' to its second phase, and the promotion of a pilot project for tokenizing government bonds. Vice Governor Kwon said, "To fully realize the potential benefits of tokenization, it is essential to evaluate new efficiencies and the new vulnerabilities that may arise from them in a balanced manner." He added, "It is important to establish an appropriate proactive policy and regulatory framework that can respond before potential risks materialize."

Below is the full statement from Vice Governor Kwon.

Hello everyone. I am very pleased to be with you today. It is an honor to deliver the opening remarks at the presentation of the IMF Global Financial Stability Report (GFSR) on 'Scaling Tokenization: New Efficiencies, New Vulnerabilities'.

I sincerely thank Athanasios Vamvakidis, Deputy Director of the IMF Monetary and Capital Markets Department, for moderating today’s panel discussion. I also welcome the excellent panelists joining us today, including Emily Kwak from BlackRock, Masaki Bessho, Deputy Director of the Bank of Japan, and Sung-guan Yun, Director of Digital Currency at the Bank of Korea.

First, I would like to briefly explain why the spread of tokenization is important and why this GFSR is timely. The history of finance can be seen as a process of reducing the costs and frictions associated with transactions.

Tokenization using distributed ledger technology further advances this trend. However, the scale of potential changes brought about by this transformation is fundamentally different. By embedding transaction conditions and execution rules in the ledger, we can perform multiple stages of trading, clearing, and settlement simultaneously. In that sense, we are at a turning point where financial infrastructure can make a significant leap forward.

The IMF's GFSR has long served as a compass for central banks and policymakers by assessing the stability of the global financial system and identifying potential risks early. The fact that this report has focused on the spread of tokenization shows that these changes require careful attention from the perspective of financial stability.

Tokenized financial assets are rapidly expanding their presence across the global financial ecosystem, particularly in the capital markets of the United States and Europe. Meanwhile, advanced economies are building the necessary infrastructure, and actual transactions utilizing tokenized deposits as a means of payment are gradually increasing.

Korea has also announced a roadmap for issuing token securities and plans to expand 'Project Han River' to its second phase in the fourth quarter of this year. In addition, the Bank of Korea and the Korean government are collaborating to promote a pilot project for tokenizing government bonds next year.

In this context, the relevant chapter of this GFSR provides us with several important implications. To fully realize the potential benefits of tokenization, it is essential to evaluate new efficiencies and the new vulnerabilities that may arise from them in a balanced manner.

Gonzalo Fernandez Dionis, a senior financial sector expert at the IMF Monetary and Capital Markets Department, will provide a more detailed explanation of these issues in the following presentation.

This presentation holds significant meaning for the Asian economy. As Asia plays a key role in the global supply chain, if the speed of financial transaction settlements increases and intermediation costs decrease, both the real economy and financial markets can gain substantial benefits.

At the same time, Asia has a history of experiencing rapid capital outflows. Limited trading hours, multiple intermediaries, and settlement processes that can take days have traditionally hindered efficiency.

However, these frictions have also served as a kind of buffer during times of significant market upheaval. They have provided policymakers with time to assess and respond to market conditions.

As tokenization becomes more widespread, the room for such post-hoc responses may decrease. Therefore, it is crucial to consider appropriate proactive policies and regulatory frameworks that can respond before potential risks materialize.

Finally, I would like to use an analogy with F1 racing. To reduce lap times, having a powerful engine that can run fast on straightaways is not enough. To reach the finish line faster, a robust chassis that can withstand high speeds, tires with good grip to safely navigate corners, and brakes that can slow down appropriately at the right moments are also necessary.

The same applies to tokenization. Building a faster and more efficient financial infrastructure is essential. However, it is equally important to ensure the soundness of that infrastructure, to have safety mechanisms in place to manage that speed, and to establish a policy framework that can respond quickly when needed.

I hope that everyone present here today, as well as those participating online, will continue on a safe and successful journey toward a more efficient and resilient financial system. Thank you.

This content is provided for general informational purposes only and doesn't constitute financial, investment, legal, or tax advice. Any events, rewards, online promotions, or related information mentioned herein should not be considered a recommendation, solicitation, or invitation to purchase, sell, trade, or otherwise deal in any crypto assets. Crypto assets are highly volatile and may result in loss. The availability of WEEX services, products, and related events may vary by region. You are responsible for ensuring that your participation is in accordance with applicable local laws and regulations.