What will central banks do when tokens replace money?

Business Times

20-05-2025

WITH mainstream investment products increasingly finding a second home on the blockchain, it's a good time to ask what role central banks would play if everything they have learned while policing double-entry bookkeeping over the last 350 years becomes irrelevant.
The techno-anarchist vision behind cryptocurrencies such as Bitcoin was to free the financial well-being of individuals from the clutches of large custodial institutions – and the monetary mandarins supervising them. That utopia never materialised, but the embrace of the underlying technology by traditional banks and asset managers has taken off.
There's plenty of appetite for it. Now that apps like Robinhood have made investing super easy, Millennials and Gen Z refuse to accept that private banks will hawk unlisted unicorns to their wealthy parents, but not to the actual users of the products and services of these new-age startups. Why should lumpiness of private equity or private credit get in the way of mass access?
Democratising finance by fractionalising it was a lofty aspiration even a few years ago; it's becoming a reality now. Just last week, Franklin Templeton launched Singapore's first retail tokenised fund. The product is basically a mirror of an existing money-market instrument. But it will exist in the crypto space, allowing individuals to access it for as little as US$20.
Alternative assets now have their tokenised versions, too. KKR & Co's Health Care Strategic Growth Fund debuted on blockchain three years ago.
New terrain
Money has gone the same way as assets. Tether Holdings's market-leading coin USDT is well known to those who use the 1:1 representation of the US dollar to buy crypto. Banks, meanwhile, are jumping into the US$200 billion-plus stablecoin market to explore other use cases: Standard Chartered plans to offer a Hong Kong dollar digital clone. Rival HSBC Holdings has tokenised gold. Bank deposits may be up next.
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This is a new terrain for central banks. Historically, money and securities have been tied to accounts, their movement and ownership recorded according to Italian mathematician Luca Pacioli's 1494 treatise on double-entry bookkeeping. Central banking, which emerged in Sweden 350 years ago, put the monetary authority's ledger at the top of the system, helping to stabilise it. Paper accounts eventually gave way to electronic entries, but the basics of traditional finance remained broadly intact – until now.
Want to move some pension savings into a new fund? The back-and-forth of faxes and emails – between asset managers, distributors, fund administrators, trustees, and registrars – gets compressed when all the data needed by the software is on the blockchain. What used to take a week can be done in two days. Selling one currency to buy another in cross-border commerce is instantaneous.
But what happens if tokens end up replacing all money and securities? Will central banks still be able to run monetary policy? When manias, panics and crashes hit, can they restore calm by their usual practices – paying interest on bank reserves; temporarily creating or absorbing liquidity; or permanently loosening and tightening financial conditions through outright purchases and sales of securities? The Bank for International Settlements and the New York Federal Reserve's innovation centre joined hands to explore just those questions.
Working prototype
Theirs was no thought experiment. The researchers put together the central-banking tool kit on the blockchain. The good news is that the prototype works – in both routine situations and periods of stress. That isn't all. Project Pine also took a first stab at exploring if smart contracts could make implementation of monetary policy more nimble, efficient, and effective. They perhaps can, but not if central banks are just another participant in the money market. 'They might also require privileged access to institutional data and higher standards of privacy and security,' the researchers noted in their report last week.
In fact, when the central bank performs the functions of an 'oracle', an outside source whose data is trusted by everyone else in a decentralised network, resources don't have to be wasted on seeking consensus from participants. (For instance, it's just more practical for intermediaries to let the central bank be the sole timekeeper in interest calculations.)
Project Pine assumes a scenario where all of today's money and assets have been tokenised. The transition to that stage, if it does ever occur, may be long and messy. In the interim, as the use of tokens increases, demand for bank reserves could become volatile and hard to predict. It will be interesting to see how monetary authorities handle the coexistence of money and tokens. BLOOMBERG