Why are central banks looking at blockchains?
Central banks are tiptoeing into the world of blockchain not because it is fashionable but because every part of the money-making machine, from settlement rails to asset custody, is slowly being rewritten as code.
The financial industry is already tokenizing money-market funds, Treasurys and even bank deposits. According to the Atlantic Council, 134 jurisdictions are studying or piloting a central bank digital currency (CBDC), up from just 35 in 2020.
Meanwhile, commercial banks have begun to warn that if they cannot move tokenized deposits across public blockchains such as Solana or private ledgers like R3 Corda, they risk being left behind.
From a central bank’s vantage point, two questions matter:
- First, can traditional operations, such as open-market purchases, standing facilities and reserve remuneration still work if reserves and government bonds become smart tokens?
- Second, can monetary transmission improve when policy logic is hard-wired into code?
These questions motivate pilots such as Project Pine, Project Guardian in Singapore, the Bank of England’s wholesale CBDC sandbox and Japan’s multiyear retail CBDC pilot.
What is “tokenized” monetary policy?
Tokenized monetary policy means that the liabilities and assets a central bank uses to steer short-term interest rates exist as programmable tokens on a distributed-ledger platform.
In such a token arrangement, what the BIS describes as an ecosystem where money and securities share a common ledger, monetary functions are executed by smart contracts, replacing the traditional batch file processes used in overnight real-time gross settlement (RTGS) systems.
In practice, each policy tool is expressed as code:
- Interest on reserves becomes an automated coupon that accrues to a wallet address once a block closes.
- Repo and reverse-repo agreements become conditional asset swaps that self-liquidate at maturity.
- Collateral haircuts are numeric parameters the central bank can toggle in real time, with changes propagating instantly to all counterparties.
Project Pine demonstrated all three, using ERC-20 tokens for reserves and securities on a permissioned Ethereum-compatible chain.
But how is tokenized monetary policy different from traditional monetary policy?
Traditional policy operations rely on central bank systems such as Fedwire or the Bank of England’s RTGS. These systems close overnight, settle in discrete batches and require multiple human sign-offs.
A tokenized system settles atomically in seconds, keeps an immutable audit trail and lets policy adjustments propagate without waiting for dealers to book trades. The BIS paper on tokenisation notes that combining assets and settlement on a single ledger can shrink operational risk and latency.
Did you know? A repo is a short-term secured loan in which one party sells securities and agrees to repurchase them later at a higher price. In contrast, a reverse repo is the same transaction viewed from the counterparty’s perspective (buying the securities and later reselling them).
What is Project Pine?
Project Pine is a research initiative led by the BIS Innovation Hub and the New York Fed that explores how central banks could run monetary policy in a future where money and government securities are digital tokens managed on blockchain-like systems.
Launched in late 2024 and published in May 2025, the project built a working prototype, a “starter kit” for central banks, designed to test whether tools like interest on reserves, repo operations and asset purchases can be run using smart contracts.
The project ran simulated financial scenarios, mimicking both calm and crisis conditions:
- Normal conditions: The smart contract automatically conducted a one-day reverse-repo, draining reserves by posting bids at a pre-set interest rate.
- Liquidity shock: When simulated market stress pushed interest rates too high, an emergency lending facility kicked in automatically, within seconds, helping stabilize rates.
- Asset-purchase program: The toolkit accepted bids, calculated allocations and settled trades between digital reserves and tokenized bonds instantly.
These scenarios were run in a test environment with simulated commercial banks and a programmable blockchain platform. Everything from interest payments to collateral valuation was automated, providing a glimpse into how monetary policy might function in a 24/7, tokenized financial system.
This was not an isolated experiment. Other central banks are running parallel pilots that explore similar ground with their distinct approaches:
- Although temporarily offline as of May 24, 2025, MAS news releases show that Singapore’s Project Guardian has tested tokenized deposits and government bonds in…
cointelegraph.com