FDIC Vice Chair delivers remarks on tokenization

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On March 11, FDIC Vice Chairman Travis Hill delivered prepared remarks on “Banking’s Next Chapter? Remarks on Tokenization and Other Issues.” The speech addressed the evolution of money and payment systems, focusing on the recent innovation of tokenizing commercial bank deposits and other assets and liabilities. Hill distinguished tokenization from assets like Bitcoin and Ether: “tokenization involves a representation of ‘real-world assets’ on a distributed ledger, including… commercial bank deposits, government and corporate bonds, money market fund shares, gold and other commodities, and real estate.” Hill highlighted the potential benefits of tokenization, such as improved efficiency in payments and settlements, 24/7/365 operations, programmability, atomic settlement (the settlement, or the act of transferring ownership of an asset from seller to buyer, combining instant and simultaneous settlements) and the creation of an immutable audit trail. He also mentioned that these innovations could streamline complex processes like cross-border transactions and bond issuances, offering notable advantages over traditional banking systems.

The speech also acknowledged challenges and risks associated with tokenization, including technical, operational, and legal uncertainties. Questions remain about the structure of the future financial system, interoperability between different blockchains, and the legal implications of transferring ownership via tokens, Hill added.

Regarding the regulatory approach to digital assets and tokenization, Hill expressed the need for as much clarity as possible, even in areas whether the technology is evolving quickly. For example, Hill noted that “it would be helpful to provide certainty that deposits are deposits, regardless of the technology or recordkeeping deployed, and if there are reasons to distinguish some or all tokenized deposits from traditional deposits for any regulatory, reporting, or other purpose, the FDIC should… explain how and why.”