In a May 8 speech at a digital assets conference, Fed Governor Lisa Cook discussed the opportunities and financial stability implications that tokenization presents for financial markets. Governor Cook, who chairs the Fed’s Committee on Financial Stability, noted that tokenization — the process of generating and recording a digital representation (i.e., a token) of an asset on a new platform or technology, such as distributed ledger technology — has gained significant traction in financial systems, with tokenized assets in the U.S. more than doubling their market capitalization to around $25 billion in the past year. Cook described how new platforms utilizing distributed ledger technology can enhance collateral mobility, liquidity management, transparency, and automation, and that tokenization could offer faster cross-border payments and expanded market access, particularly in emerging economies. Cook stressed that she views the integration of tokenized platforms with traditional market infrastructure as a path to enhanced efficiency rather than a replacement for existing systems.

Cook also cautioned that scaling tokenization could introduce new complexities and risks to financial stability, including liquidity transformation, interconnectedness between tokenized and traditional assets, and operational vulnerabilities such as cyber threats. She noted that “around-the-clock” trading and settlement could reduce redemption pressure and accelerate runs if token-market disruptions occur outside normal trading hours. In her remarks, Cook contended that tokenization could increase issuers’ exposure to shocks originating from secondary markets unrelated to underlying asset values, and that the automation inherent in smart contracts may reduce the ability to correct errors or respond to threats in real time. While committing to supporting “responsible innovation,” Cook concluded by noting ongoing collaboration with multilateral institutions and peer central banks to better understand tokenization’s implications.