ECB pushes tokenisation plan

The European Central Bank said on April 13 that turning bonds, funds and cash claims into digital tokens could help knit Europe’s capital markets together — if the plumbing and rules catch up. (ecb.europa.eu) Tokenisation means recording an asset as a digital token on a distributed ledger, a shared database that can also automate coupon payments, collateral moves and settlement. In Bulletin 33, the European Central Bank said that setup could cut frictions in Europe’s fragmented post-trade system and support the European Union’s savings and investments union. (ecb.europa.eu) The central bank’s bond study compared tokenised bonds with matched conventional bonds and found lower borrowing costs and better liquidity for the tokenised group, but no visible reduction in operational costs. The European Central Bank said the market is still in its infancy and that bigger gains depend on scale and on the infrastructure underneath it. (ecb.europa.eu) A separate article said tokenised money market funds remain small but are expanding rapidly. Those funds issue their shares as tokens on distributed ledgers, which can widen access and speed transfers, but the European Central Bank said the design choices also raise financial-stability questions. (publicnow.com) The European Central Bank tied the push to a broader policy goal: building an integrated market for digital assets in euros instead of letting trading, settlement and custody splinter across national systems and private platforms. Executive Board member Piero Cipollone said on March 23 that Europe has moved from tokenisation pilots toward production and needs common rails, euro settlement assets and European Union-wide rules. (ecb.europa.eu) That is why the Eurosystem keeps returning to central bank money as the anchor. Cipollone said private settlement assets such as tokenised deposits and stablecoins can play a role, but they need a trusted public backstop to work across the whole market. (ecb.europa.eu) The infrastructure build-out is already under way. The Eurosystem’s 2024 exploratory work covered participants in nine jurisdictions and transactions worth about €1.6 billion, and the European Central Bank says its Appia and Pontes projects are meant to connect distributed-ledger platforms with TARGET services and central bank money settlement. (ecb.europa.eu; (ecb.europa.eu) The stablecoin paper shows why the central bank wants guardrails. It says euro-denominated stablecoins are still limited today, but if they grow, issuers could become new buyers of euro-area sovereign bonds because those bonds can sit in reserve portfolios. (ecb.europa.eu) That demand could support government bond markets in normal times, but the same reserve structure could transmit stress in a crisis if investors rush to redeem tokens and issuers have to sell assets. The European Central Bank’s bulletin ends up backing tokenisation, but only with interoperable systems, supervision and central bank settlement at the core. (ecb.europa.eu; (ecb.europa.eu)