IMF maps out how tokenized reserves support settlement systems

Wholesale central bank digital currencies (CBDCs), also known as tokenized reserves, could be the most effective way to preserve the liquidity and security of central bank money and support future settlement systems, according to the International Monetary Fund (IMF). The UN agency, however, warns against contagion risks from DLT failures, a shift in liquidity dynamics sparked by 24/7 settlement and governance risks.

In Ghana, the central bank is set to launch a controlled rollout of its eCedi CBDC to reinforce the cedi as the country’s only legal tender amid a rise in stablecoin usage.

IMF backs tokenized reserves

In a recent fintech note titled ‘Central Bank Exploration of Tokenized Reserves,’ the IMF explored the legal and monetary implications of wholesale CBDCs and offered central banks a conceptual framework to guide their efforts.

While ‘wholesale CBDCs’ is the most popular label, the IMF argues that ‘tokenized reserves’ is more accurate, noting that “the only change lies in the technology settling reserves as they already exist in digital form.”

The Washington-based organization says one of the primary advantages of tokenized reserves is that it preserves the role of central bank money as a risk-free settlement asset.

“The use of central bank money for interbank settlement is essential for maintaining financial stability, as it minimizes credit and liquidity risks,” it argues.

The report mirrors several others that have called for governments to strengthen the role of central bank money in light of the emergence of private digital currencies. One such report by the Bank for International Settlements (BIS) argued that CBDCs serve as the best counterweight to digital assets and stablecoins.

Beyond preserving monetary sovereignty, the IMF states that the use of DLT to underpin tokenized reserves could enhance the resilience, efficiency, and transparency of financial systems.

Being decentralized, DLT doesn’t have a single point of failure, unlike existing systems. This decentralization also enhances transparency through shared data access, which ultimately aids in regulatory compliance.

While it initially set out to replace RTGS systems, DLT has evolved to focus on advanced use cases such as delivery-versus-payment (DvP) settlement for asset transfers. DvP guarantees that a payment is only settled once goods are delivered.

Regardless of the chosen model, central banks must decide whether they want interbank reserves and settlement flows to be fully or partially tokenized. In the second scenario, central banks would still maintain existing systems like RTGS alongside the wholesale CBDCs.

Ghana ready for CBDC

In Ghana, the central bank is preparing to launch a central bank digital currency in a controlled environment, a banking official recently revealed.

Ghana was among the earliest African countries to explore CBDCs and has been developing the eCedi for over six years. The West African nation is finally ready to roll out its digital currency, according to Abena Osei-Poku, the managing director of Ecobank Ghana.

Speaking at an event celebrating 60 years of Ghana’s cedi, she noted that the Bank of Ghana had made significant strides in its CBDC exploration. She believes that the eCedi, combined with other digitalization efforts, will take Ghana’s payments sector to a new level.

BoG has conducted eCedi pilots in which participants made day-to-day transactions with the digital currency. The bank’s head of fintech, Kwame Oppong, said earlier this year that it expects to launch the eCedi this year.

Ghana would join neighboring Nigeria as the only African country with CBDCs. Nigeria’s eNaira, however, has been a disappointment, failing to garner adoption as most Nigerians stuck to established legacy systems. Its failure has sparked the rise of stablecoin payments, including local solutions like cNGN.

Despite its dismal adoption, Ecobank’s Osei-Poku believes the eNaira has demonstrated that a CBDC can improve regulatory oversight. She claimed that the eNaira gave the Central Bank of Nigeria better insight into the country’s payment sector.

Watch: Finding ways to use CBDC outside of digital currencies