A recent Swiss National Bank event heard from representatives from leading international banking institutions on tokenization and the future of money, with opinions and predictions varying between optimism and concern.
In terms of the latter, the Bank of England (BoE) highlighted concerns about incumbents failing to deliver, while the Bank for International Settlements (BIS) Innovation Hub was worried about whether incumbents would keep all the benefits to themselves or pass them on to customers. A broader concern for the International Monetary Fund (IMF) is that tokenization could risk fragmenting the global financial community’s efforts to create a coherent global network.
However, the panel event, titled “Towards the future of the monetary system,” was not all doom and gloom, with BoE Deputy Governor Sarah Breeden suggesting that the future of tokenization has many potential roads, both positive and negative.
“My sense is that we may be on the cusp of a widespread and more fundamental change (for payments),” said Breeden, who went on to suggest the future of tokenization is uncertain, with possible outcomes spread across a broad spectrum, from success to failure.
At one end of the spectrum, Breeden saw “a stymied innovation option where efforts to integrate are slow or unsuccessful. Fragmentation crystallizes and we get costs of efficiency and risk management benefits being unrealized.”
Another scenario she noted was “unconstrained innovation.” Incumbents are unable to deliver, allowing tokenization efforts to be led by newcomers but outside of existing frameworks.
Breeden also predicted two potential waves of tokenization benefits. The first leverages the efficiencies enabled by automation of settlement, which would “broadly preserve the current structure of payment and settlement.” The second is a more disruptive transformation, with post-trade processes collapsing, removing layers of intermediaries.
While Breeden and the BoE may be concerned about incumbents’ ability to keep pace with and deliver on innovation and tokenization, Head of the BIS Innovation Hub Cecilia Skingsley had a contrary concern—whether incumbents would keep all the benefits to themselves or pass them on to consumers.
Skingsley was also keen to highlight how transformative the technology could prove to be a core aspect of the global economic system.
“We’re talking about really one of the fundamental keystones in society, the singleness of money. You can’t play around with that,” said Skingsley, who asked Breeden, “How confident are you that they will actually work because we are upping the game now?”
In response, Breeden acknowledged that DLT technology is relatively unproven in the mainstream monetary system.
“There are trilemmas all over the place in terms of security, speed, and scalability. But what I am clear about is that it’s on us to be ready in case they are.”
In terms of getting prepared, the BIS has not been idle. In collaboration with seven central banks, including the BoE, the institution announced Project Agorá in April to create a platform for cross-border central bank digital currency (CBDC) payments and tokenized money transfers. It is one of multiple BIS projects in the works.
On an optimistic note, the IMF’s Deputy Director for Monetary and Capital Markets Department (MCM), Dr. Dong He, said that tokenization can be a force for financial inclusion.
According to Dr. He, the IMF believes the innovation could play an important role in improving cross-border payments and broadening access to capital markets for developing and emerging economies.
However, Dr. He also cautioned against allowing tokenization to fragment the “very hard work put in by many central banks and authorities in the post-war period that culminated in a very highly efficient, integrated, international monetary system.”
“We think independent of geopolitical developments …(which) … could lead to fragmentation, if we have failures in coordination, technological development itself might lead to fragmentation,” warned Dr. He, who concluded by posing a rhetorical question for panelists and listeners to consider.
“How do we make sure that the international monetary system will continue to be highly integrated and at the same time efficient? That’s a big challenge.”
If the event is anything to go by, this is a challenge that leaders in the global banking sector are clearly already grappling with.
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