The Bank for International Settlements (BIS) has released a blueprint for a global “unified ledger” aimed at supporting Central Bank Digital Currencies (CBDCs) and tokenized assets. This visionary plan, outlined in a report published on Tuesday, envisions a future where programmable platforms overseen by central banks drive the transformation of monetary systems through tokenization.
The BIS report heralds tokenization as the next major leap in the evolution of the monetary system. By digitizing and representing claims on a programmable platform, tokenization revolutionizes the way financial transactions are executed. Unlike traditional ledger systems, this innovative approach automates and seamlessly integrates financial activities, paving the way for a more efficient and secure global financial ecosystem.
However, the BIS did not hold back in its criticism of the crypto sector, referring to it as “a flawed system” that cannot assume the mantle of the future of money. According to the report, the collapse of crypto and the stumbling progress of other tokenization projects underscore a crucial lesson: the success of tokenization rests on the foundation of trust provided by central bank money and its ability to unify key elements of the financial system.
Tokenization, as described by the BIS, offers fundamental advantages over traditional ledger systems. By transforming money and assets into “executable objects” on programmable platforms, tokenization enables the transfer of value through programming instructions, eliminating the need for intermediaries. This transformative capability shifts intermediaries’ role from being mere bookkeepers to becoming rule book curators. Various banking organisations have recognised the potential of tokenization in their survey/research reports.
The BIS report identifies smart contracts as a key use-case for the unified ledger. These self-executing contracts, enabled by blockchain technology, address coordination problems that often plague joint ventures. By specifying that each participant contributes only when others also contribute, smart contracts eliminate free-riding and promote the stability of bank funding.
Moreover, the report highlights the potential of unified ledger technology in transforming supply chain financing. By integrating real-time information into smart contracts, delays in payments and the need for pre-production financing for suppliers can be mitigated.
The BIS’s dedication to exploring CBDCs has been evident in recent projects. In February 2023, the BIS announced its heightened focus on CBDCs with the launch of “Project Pyxtrial.” This experiment facilitated the systemic monitoring of stablecoins and aimed to develop policy frameworks based on integrated data.
March 2023 saw the revelation of the results of “Project Icebreaker,” a cross-border payment model for CBDCs conducted in collaboration with the central banks of Israel, Norway, and Sweden. The project demonstrated the effectiveness of the “hub-and-spoke” method, reducing fees and delays in cross-border transactions while ensuring sufficient liquidity.
As the BIS pushes the boundaries of innovation, it aligns with the Group of 20 industrialized nations’ priority of exploring cross-border payment solutions. With central banks worldwide considering the issuance of CBDCs within the next decade, the BIS’s visionary blueprint and successful experiments pave the way for a future where digital currencies and tokenization play a central role in reshaping the global financial landscape.
By harnessing the power of technology and leveraging the trust instilled by central bank money, the BIS is poised to revolutionize the way we transact, ultimately ushering in a new era for money and finance.