Transforming finance through tokenisation and central bank roles

In a keynote address at the 24th Annual Symposium hosted by Harvard Law School, Piero Cipollone, Member of the ECB Executive Board, discussed the future of finance with a focus on tokenisation and distributed ledger technology (DLT).

He highlighted that financial innovation should improve capital allocation and risk management at the lowest cost, noting that historical technological advances have not significantly reduced the cost of connecting borrowers and savers. Cipollone questioned whether tokenisation could break this pattern by enabling genuine efficiency gains.

Tokenisation is a general-purpose technology that can reframe the entire financial system by recording assets as digital tokens on DLT networks, allowing issuance, trading, settlement, and custody to occur within a single, 24/7 digital environment. This can reduce costs and automate processes through smart contracts.

However, the benefits of tokenisation depend on the simultaneous adoption of its components across the market, similar to historical examples like electricity. The interconnectedness of market components, such as secondary markets, repo markets, derivatives, legal frameworks, and central bank liquidity, is essential for realizing productivity gains.

Coordination challenges arise because no single component can transform the system alone, and incumbents may have incentives to resist change due to rent extraction. Historical electrification efforts show the importance of standardisation and regulation to achieve broad adoption and productivity increases.

In the context of tokenised finance, establishing common standards and ensuring equal access to networks are crucial to prevent fragmentation and promote competition. The design choices made now will influence whether the system becomes a single shared network or interconnected multiple networks, affecting liquidity and innovation.

The ECB sees a key role for central banks in supporting this transition. First, by issuing tokenised central bank money and making it eligible as collateral, which is vital for scalability and trust in digital markets. The Eurosystem has conducted trials and plans to offer tokenised settlement for DLT-based transactions through the Pontes project, safeguarding monetary sovereignty.

Second, central banks can act as market catalysts by developing a shared vision for an integrated ecosystem. The ECB’s Appia roadmap aims to create a blueprint for a European tokenised financial system by 2028, focusing on standards, interoperability, legal frameworks, and cross-border connectivity. This institutional effort is comparable to historical standardisation in electricity infrastructure.

In conclusion, tokenisation and DLT have the potential to deliver unprecedented efficiency gains, but their success depends on policy, regulation, and standardisation choices. An integrated, competitive ecosystem anchored in central bank money can foster a transformation that reduces financing costs and broadens economic benefits.

Thank you.