Yesterday a panel at the IMF Spring meetings covered the topics of DLT and tokenization of financial markets. The IMF’s Tobias Adrian moderated the discussion, observing there was “no lack of ambition” in the vision of the panelists.
One of the strongest rallying cries was from outgoing BIS general manager Agustín Carstens who said, that “tokenization can be the future of a financial system with a sophistication that we cannot imagine today.” He emphasized that by including programmability within the token, new types of contingent transactions become viable.
Mr Carstens also observed that countries that adopt tokenization early, especially those that might be considered backward today, could potentially leapfrog to become far more advanced, contributing to the financial wellbeing of their economies. While he pointed to India’s Aadhaar identity system, which had a profound financial inclusion impact, we’d add the more pedestrian example of ATMs.
In the early 1980s there were only 100,000 ATMs globally compared to more than three million today. Some of the first countries to adopt them at scale were emerging economies. A key reason was more advanced economies had to integrate ATMs into legacy back office systems. Emerging market banks had more rudimentary systems, so it was far easier to integrate them. Similarly, countries with less developed market infrastructures will find tokenization easier to roll out because they won’t be held back by the integration issues with legacy systems.
Meanwhile, it’s widely known that the BIS has been working on Project Agorá, a tokenized cross border payment system involving seven central banks and more than 40 private sector firms. However, Mr Carstens also revealed a new initiative, Project Pine, that incorporates wholesale CBDC, commercial bank money, and tokenized government securities in a way that facilitates monetary policy.
Open source Finternet tools
A year ago Mr Carstens outlined his vision of the Finternet which he developed with Infosys Chairman and co-founder Nandan Nilekani, who also led the Indian government department that developed Aadhaar. In much the same way as people can freely use the internet, the Finternet would enable people to transfer any financial asset, using any device, to anyone in the world.
During the IMF event, Mr Nilekani outlined the requirements to enable the vision. They are user centricity, a unified architecture that supports all types of assets, and universal availability.
In the year since releasing the Finternet paper, work has progressed on building tools to enable the vision, which he referred to as a “universal information tokenized system”. He says the tools are capable of billions of transactions on public blockchains, although he is not wedded to a particular technology. Open source tools will likely be released by the end of the year, and pilots are progressing with central banks and corporates.
The role of central banks?
Mr Carstens sees the role of central banks as steering the participation of the private sector and maintaining trust by ensuring the singleness of money and finality in payments. He also outlined a roadmap for central banks to steer tokenization into the mainstream.
This includes clearly articulating the vision and coordinating with other regulators to provide a regulatory framework. He envisions the central bank as enabling the foundational assets, which are part of the new Project Pine – wholesale CBDC, tokenized commercial bank money and tokenized government bonds. Additionally, central banks should provide the basic foundational infrastructure to ensure interoperability with the unified ledger. Finally, there’s a need for a public – private sector partnership to make the vision a reality.
Piero Cipollone, Director of the European Central Bank (ECB), outlined his vision of using tokenization to enable a capital markets union. A recent European Commission consultation gives considerable attention to tokenization as an important tool in its efforts.
However, Mr Cipollone observed that the path to mainstream tokenization is “a bumpy road and, and many things can go wrong.” He highlighted the fragmented nature of current European markets, with 41 trading venues and 27 central securities depositories. The last thing he wants is for tokenization to contribute to fragmentation. There’s also a risk that very large players could dominate tokenized markets, whereas the ECB wants to encourage competition. Another key goal is to encourage innovation, so the central bank doesn’t want to get so tied to a single technology that it might inhibit future innovation.
While fragmentation and interoperability were raised as concerns during the panel, the overall message was one of big ambition. As Mr Carstens put it, “Our imagination is the limit in terms of using tokenization to really shift the boundaries of the financial system.”
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