In Brief

In Brief

  • Tokenization and decentralization are critical to meet new demands for money and efficient payment systems in national and international transactions.
  • Central bank digital currency has been actively explored to prove security, scalability and resiliency of the systems and technology.
  • As key monetary innovators, Central Banks can create better performing, more resilient payment architectures by leveraging new technology.
  • This report is the second in a series following The (R)evolution of Money 2017


Money as a medium of exchange has seen little innovation since the introduction of paper currencies and cashless transfers in the nineteenth century. However, in the last two years new financial ecosystems driven by technology have uncovered new functionalities for money. The role of central bank money continues to increase, having moved on from the talk of private crypto-assets. Its unique properties remain essential for financial stability and the operation of national and international payment transactions, yet the requirements for what money does are changing.

The prospects of significant efficiency gains, better distribution of liquidity and more equitable access to payments, constitute key motivations for central banks to reconsider their roles in digital payments.

Tokenization and Central Bank Digital Currency

Tokenization and decentralization are critical to meet new demands for money and establish more direct, transparent and efficient payment systems. Tokenization has emerged as a format to represent goods, assets and rights. It offers new financial utility and attributes, promising greater flexibility and liquidity. Central bank issued digital currency (CBDC) or tokenized central bank money leverages the decentralized and secure advantages of blockchain. This enables peer-to-peer transactions, offers a more resilient payment infrastructure, reduces transaction costs, enhances information sharing capabilities and facilitates data reconciliation. Blockchain enabled payment solutions have been rigorously tested by central banks across North America, Europe and Asia. Download the report to learn more about these developments.

Digital medium of exchange

Crypto-assets that exhibit currency-like functions—cryptocurrencies—raise important financial stability concerns. The use of blockchain technologies may offer certain advantages relative to conventional currencies yet the lack of a regulatory framework for many of these alternatives remains a significant constraint. The continued emergence of crypto-assets does indicate new use cases for currencies.

The money flower: a taxonomy of money The money flower: a taxonomy of money

Image: Adapted from M Bech and R Garratt, “Central bank cryptocurrencies”, BIS Quarterly Review

The readiness of blockchain enabled payment solutions has made significant progress during the past several months. Blockchain can now address residual concerns about scalability and inter-operability and therefore offers the foundation for advancing towards select real-life applications and implementation plans.

The greatest benefits of CBDC are to be found in the broader context of reshaping payments relations and rests in the integration of assets and currency on a single ledger in the combination of tokenization, decentralization and secure information sharing. CBDC attracts payment applications in retail, wholesale and cross-border transactions. Considerations differ largely dependent on local circumstances and preferences. The adoption of CBDC will depend on set policy objectives.



Central banks can play a major role in shaping the new landscape since they maintain the unique—and essential— convening power needed to bring together disparate players in the financial sector. This will minimize fragmentation in the market and establish a strong foundation.

Success factors include:

Governance

Driving the necessary governance structures, rules and putting policies in place.

Growth & protection

Ensuring economic growth alongside security for consumer protection.

Control

Supporting the adoption of progressive approaches to currency control and use.

Central banks can act now as catalysts to help shape a new emerging financial architecture.

John Velissarios

Security Lead – Global Blockchain Technology


Ousmène Jacques Mandeng

SENIOR ADVISOR – GLOBAL BLOCKCHAIN TECHNOLOGY

MORE ON THIS TOPIC


Subscription Center
Stay in the Know with Our Newsletter Stay in the Know with Our Newsletter