28-05-2025
How central banks are testing blockchain-based monetary policy
Tokenized monetary policy means that the liabilities and assets a central bank uses to steer short-term interest rates exist as programmable tokens on a distributed-ledger platform.
In such a token arrangement, what the BIS describes as an ecosystem where money and securities share a common ledger, monetary functions are executed by smart contracts, replacing the traditional batch file processes used in overnight real-time gross settlement (RTGS) systems.
In practice, each policy tool is expressed as code:
Project Pine demonstrated all three, using ERC-20 tokens for reserves and securities on a permissioned Ethereum-compatible chain.
But how is tokenized monetary policy different from traditional monetary policy?
Traditional policy operations rely on central bank systems such as Fedwire or the Bank of England's RTGS. These systems close overnight, settle in discrete batches and require multiple human sign-offs.
A tokenized system settles atomically in seconds, keeps an immutable audit trail and lets policy adjustments propagate without waiting for dealers to book trades. The BIS paper on tokenisation notes that combining assets and settlement on a single ledger can shrink operational risk and latency.
Did you know? A repo is a short-term secured loan in which one party sells securities and agrees to repurchase them later at a higher price. In contrast, a reverse repo is the same transaction viewed from the counterparty's perspective (buying the securities and later reselling them).
