Fed's Waller says blockchain shows promise, but tokenization risks remain

Federal Reserve Governor Christopher Waller said Thursday blockchain technology shows "considerable promise", but warned against risks associated with tokenization and smart contracts. "Blockchain has primarily served as the ledger of record for crypto-assets, but it may be suitable to play a similar role for traditional assets, such as securities and derivatives," Waller said while addressing the Cryptocurrency and the Future of Global Finance event in Florida. He acknowledged that blockchain can offer near-real time transfers, reducing liquidity risks. "I will note that these benefits are not unique to blockchains. The FedNow service, which is set to begin operations in July , does not rely on blockchain." Waller highlighted the fact that tokenized assets are programmable and have smart contract functionality, which mitigates settlement and counterparty credit risks. While noting that companies have been testing blockchain for foreign exchange trades and intraday repo transactions, Waller said these efforts are still in early stages. "I expect that as functionality expands with more currencies, eligible securities, and new products, there will be more participation and growth." As for artificial intelligence, Waller said the Fed is having regular discussions with banks testing AI regarding associated risks. "Whether and how they might make use of generative language models remains to be seen." "Tokenization and AI are just a few innovations that may come to play a prominent role in banking and more broadly in the economy," Waller concluded . He did not make any statement on monetary policy. Earlier this year, Waller said cryptocurrency was "nothing more than a speculative asset, like a baseball card." In other news, Cleveland Fed's Mester still sees policy rate over 5%, but keeps eye on lending.