Building on the proposal for a unified ledger, the “trilogy” of tokenized central bank reserves, commercial bank money and government bonds is the next logical step to deliver profound change for the financial system, wrote the Bank for International Settlements (BIS) in a special chapter of its annual report. Tokenization is defined as the digital representation of assets on programmable platforms, which integrates messaging, reconciliation and settlement into a single operation.
“A tokenized unified ledger incorporating central bank money, commercial bank deposits and government bonds will lay the foundations of a tokenized monetary and financial system based on the time-tested principles of sound money,” the BIS said, noting also that stablecoins as a form of sound money fall short and without regulation pose a risk to financial stability and monetary sovereignty.
“Tokenization of deposits and central bank money means that both the primary means of payment as well as the settlement function of central bank money can be integrated seamlessly on the same programmable platform. It has the potential to transform securities markets, and its application to correspondent banking is especially promising,” said Hyun Song Shin, economic adviser and head of the Monetary and Economic Department at BIS, in a statement.
Repo trilogy
According to the report, markets for repurchase agreements, in which government bonds are a key collateral source, are the next natural setting to apply the tokenized trilogy because they are heavily used to invest or raise cash at short notice and help support liquidity in the underlying securities markets.
According to industry estimates, outstanding amounts of repos and reverse repos stood at nearly €10.9 trillion ($12.6tn) in Europe at end-December 2024, according to the International Capital Market Association’s repo survey and $8.3 trillion in the US according to primary dealer data released by the Federal Reserve in June and compiled by Finadium, while Asia was at $6.0 trillion, according to Finadium analysis.
A key advantage of tokenized repos lies in their ability to facilitate intraday transactions by enabling instant transfer of collateral simultaneously with the payment. Such functionality, largely absent in conventional repo markets, can reduce risks and support financial institutions’ liquidity management, for example to meet intraday margin calls.
Margin calls have become increasingly significant due to more prevalent margin requirements. Given the size of the repo market and the critical role repos play in funding and liquidity management, even small efficiency improvements could translate into substantial cost savings. Accordingly, industry and public initiatives have been exploring ways to make use of programmability to enhance automation, speed and efficiency beyond what traditional repo transactions offer.
Speaking at a media briefing, Shin said that the BIS team envisages this trilogy of central bank money, tokenized deposits, and tokenized bonds, on the platform. Project Agorá focuses on tokenized deposits and central bank money, whereas Project Pine examines tokenized government bonds, which Shin noted is still “very much experimental”.
“Already commercial banks have their own proprietary tokenization platforms that have looked at this and they are providing the tokenized services on repo but clearly, if we had something that also had the central bank on the platform, that would actually enable something which is much more encompassing in its scope and much broader in its coverage,” Shin said.
The kinds of new functionalities the BIS is considering would have important implications for repo and collateral markets, including interest free intraday transactions, or payment versus delivery for money/collateral exchange.
“The key is not the technology itself, because that’s something that’s already available from commercial banks on their proprietary platforms, it’s more that with the central bank there on the platform you will have something which has much broader coverage,” he said.
Realizing the full potential of the system requires bold actions by central banks, which need to work in partnership with the private sector and other public authorities, said Agustín Carstens, general manager at the BIS in a statement, which highlighted Project Agorá as a collaborative effort led by the BIS with seven central banks and 43 private sector institutions.
“The BIS is not just theorizing, it is working with central banks to test and develop tokenization as the backbone of the future monetary and financial system. The BIS Innovation Hub’s Project Agorá harnesses tokenization to improve cross-border payments in the banking system and make them seamless, more efficient and cost-effective. Project Pine explores how central banks can implement monetary policy operations in a tokenized world,” said Andréa Maechler, deputy general manager and acting head of the BIS Innovation Hub, in a statement.