By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Piero Cipollone said on Monday that tokenized financial markets needed central bank money in tokenized form at their core to preserve monetary policy effectiveness, financial stability and monetary sovereignty.
In a speech in Rome, Cipollone said tokenization and distributed ledger technology could improve financial services and reduce costs, but that the gains would not materialize automatically.
“[T]okenization has the potential to unlock efficiency gains and reshape financial intermediation,” he said. “But markets based on tokenization and DLT need central bank money in tokenized form at their core.”
Without tokenized central bank money as a settlement asset, transactions in the new ecosystem would need to be settled using instruments carrying credit risk and lacking the finality only central bank money could provide, he said.
Tokenized central bank money was needed for the market to reach a critical mass at which it became rational for all parts of the financial system to adopt the new technology, Cipollone said.
From September, the Eurosystem would offer tokenized central bank money settlement for DLT-based transactions as part of its Pontes project, he said.
This would provide “a safe asset and a trusted common anchor” that tokenized markets could use to grow at the speed and scale Europe needed, he said.
Since the end of March, the Eurosystem had also accepted marketable assets issued in central securities depositories using DLT as collateral for credit operations, Cipollone said.
The central bank was exploring ways to expand eligibility to DLT-issued assets not represented in eligible securities settlement systems, he said.
Tokenization allowed the full life cycle of a transaction, including issuance, trading, settlement and custody, to take place in a single digital environment available around the clock, Cipollone said.
Such a system could simplify access to finance, improve services and lower costs, but only if different parts of the financial system adopted the technology together, he said.
Common standards would be crucial to avoid fragmentation and “walled gardens,” while the network layer should provide equal and non-discriminatory access to all participants, he said.
The design choices being made now would determine the configuration into which the system locked and whether the gains of tokenization were broadly distributed, according to Cipollone.
Stablecoins and tokenized deposits could be part of an ecosystem in which central bank money preserved the singleness and scalability of money, he said.
However, if stablecoins became the only settlement asset for retail and wholesale transactions, they would attract a significant share of bank deposits and profoundly change bank liabilities, Cipollone said.
This would make deposits more volatile and more concentrated, affecting banks’ ability to provide credit to the real economy and weakening the transmission of policy rates, he said.
Private payment instruments perceived as safe and liquid could also face sudden large-scale redemptions if confidence weakened, Cipollone warned.
In a digital environment, such runs could unfold very rapidly, forcing issuers to sell assets quickly and potentially disrupting financial markets, he said.
Foreign-currency-denominated stablecoins could also challenge monetary sovereignty if widely used for domestic payments, Cipollone said.
If households and businesses switched to foreign-currency stablecoins for payments and savings, domestic monetary authorities could lose control over the money supply and interest rates, he said.
Central banks therefore needed a forward-looking approach that supported innovation while preserving the foundations of the monetary system, he said.
“The Eurosystem has embraced this vision,” Cipollone said. “We aim to preserve the balance between public and private money, which has served us well so far, and will continue to do so in the new DLT and tokenization-based financial ecosystem.”
