monitor crypto, AI and tokenization

In a recent open letter from the President of the Financial Stability Board (FSB) of the G20, Klaas Knot, it is reiterated that they will continue to closely monitor the implications of digital innovations on financial stability: among these, crypto markets, tokenisation and artificial intelligence (AI).

The FSB is the financial stability board of the G20 which aims to monitor the global financial system.

Klaas Knot’s letter: the G20 focus on crypto, tokenization and AI

The open letter from the FSB Chairman is addressed to the G20 finance ministers and their respective central bank governors.

Knot says the FSB has developed a comprehensive work plan for 2024 that incorporates the priorities of Brazil’s G20 presidency.

The main elements of the plan are to identify and address system vulnerabilities

financial, with particular attention to banking turbulences, such as those of March 2023, to

digitalisation and climate change, as well as improving the efficiency of cross-border payments.

The objective of the council would be to obtain tangible results already during the current Brazilian presidency of the G20.

Knot believes the outlook for financial stability remains challenging, given the gap between modest economic growth and high interest rates, and geopolitical uncertainty. He also warns that global financial conditions are showing signs of easing.

After citing the banking turmoil of March 2023 as an example of significant banking stress at a systemic level, Knot argues that the international framework, however, appears to be solid.

However, it highlights some areas that deserve further attention.

Digital innovation

An entire chapter of the letter is dedicated to digital innovation.

In fact, Knot underlines how digitalisation is radically changing the way finance works, and the way the financial sector is organised.

The objective is to exploit the opportunities of digital innovation but at the same time contain the associated risks, and in this regard he writes:

“We will continue to closely monitor the implications of digital innovations on financial stability, including cryptocurrency markets, tokenization and artificial intelligence (AI).”

He therefore mentions only these three innovative sectors among his priorities, in the context of digitalisation, thus making it clear how much the G20 financial council is focusing on new crypto markets and AI.

Knot also promises finance ministers and central bank governors that it will provide reports on the financial stability implications of asset tokenization and artificial intelligence during 2024.

The goal in this regard is to provide global oversight of cryptocurrency market activity and global stablecoin agreements, and advance the implementation of a coordinated and comprehensive policy and regulatory framework.

He also adds that the acceleration of digitalisation in all sectors of finance has improved efficiency and increased the interconnectedness of the global financial system, thus increasing the possibility that an IT or operational incident at even just a single financial institution could have repercussions beyond borders and sectors.

Cross-border payments

On cross-border payments he reveals that last year the G20 roadmap moved into the next phase of action and practical improvements.

The goal is to make cross-border payments faster, cheaper, more transparent and

inclusive, while maintaining the integrity and security of the system, and Knot states in this regard that they have strengthened collaboration between the public and private sectors, in particular with regard to anti-money laundering and countering terrorist financing (AML/ CFT), as well as data protection.

In the future they want to further increase the efficiency of payment systems and strengthen their integrity and security.

Knot reveals that the G20 targets are achievable by 2027, for those making and receiving cross-border payments.

Precisely this last point, i.e. the timing, reveals how evolution in the traditional financial sector proceeds more slowly compared to the new sectors linked to cryptocurrencies, given that anything and more can happen in the crypto sector in three years.

G20: Financial stability and the impact of crypto, AI and tokenization

Knot concludes the letter by once again highlighting the priority of financial stability, with the aim of working towards a more sustainable and digitalized financial system.

This is probably precisely why crypto markets worry the G20 financial council so much.

The G20 itself (Group 20) is nothing more than a forum of leaders, finance ministers and central bank governors of the countries of the European Union, the African Union and 19 other countries among the most industrialized in the world, including the USA, China, Japan, Russia, and Great Britain.

The cryptocurrency revolution really calls into question the current system, i.e. its stability, otherwise it wouldn’t be a revolution.

So what worries the major countries in the world is precisely the questioning of their financial system, which they would like to be stable and therefore solid. They are willing to accept that it can be innovated, or at least that it can evolve a little, but they are not willing to accept that it can be overturned or surpassed.

However, if on the one hand the crypto market to date still does not seem to be able to challenge the traditional financial system, on the other, however, in some particular areas it seems to be able to overtake it, and this constitutes a major challenge for the G20 that they would not want LOSE. But the slowness with which the traditional financial system evolves, compared to the speed of the crypto markets, suggests that this could already be a lost challenge.