After dematerialization, decentralized finance and digitization, why not the “tokenization” of the monetary system?
On June 28, the European Commission presented a legislative framework for the future digital euro, a dematerialized version of the single currency. Before it, the Bank of Canada conducted a public consultation on a possible digital dollar. It plans to publish the results of this consultation, which ended on June 19, this year.
In both cases, dematerialized central bank money is presented as one payment option among others, complementary to cash. Stored on a card or a mobile phone, it will allow online payments, but also payments without any Internet connection which will preserve as much anonymity as coins and notes, we are assured.
But “for the European Central Bank (ECB), the increasing dematerialization of payments, in particular with the rise of [commerce en ligne], requires the creation of an electronic euro, at the risk of seeing the single currency increasingly compete with cryptocurrencies or digital versions of foreign currencies,” writes Agence France-Presse (AFP). And in response to financial institutions’ fears of experiencing a deposit exodus with an ECB using its own balance sheet as the ultimate means of settlement, it would impose on each depositor a ceiling amount of euros held in this form. Users “will not have a contractual relationship with the ECB”, further specifies the text. The digital euro will be distributed by banks, which will be able to integrate it into their existing services, adds AFP.
It is recalled that more than a hundred central banks around the world are currently working on the introduction of a digital version of their currency, and that China is already testing the digital yuan on a large scale.
Beyond these tests conducted here and there, the Bank for International Settlements (BIS) is working for its part to configure the universe likely to optimally link these central bank digital currencies to each other.
The potential of tokenization
For Hyun Song Shin, Economic Advisor and Head of Research of the “Central Bank of Central Banks”, after dematerialization, decentralized finance and digitization, “the monetary system is on the cusp of a new great leap forward”. Moving forward, it outlines a rough sketch of what it could be, and holds great potential for “tokenization” of money and assets combined with the confidence that a central bank digital currency provides.
Simply summarized, one can read in the Internet Journal that “tokenization” is a process aimed at securing data using the cryptographic technology of a blockchain (blockchain, in English). The user gets a ” token or token, which can be traded or stored, like any digital asset. “Apart from the security aspect, a “token” makes it possible to associate a good (material or immaterial) with functions and rights. “Moreover, “”tokenization” allows you to free yourself from the administrative burdens of a traditional investment, in addition to being exchangeable instantly and securely on the blockchain. »
Addressing the flaws of cryptoassets and the limitations of stablecoins (stablecoins), “a new type of financial market infrastructure — a unified ledger — could take full advantage of ‘tokenization’ by combining central bank money, deposits and ‘tokenized’ assets on a programmable platform,” adds the BIS economic adviser in a large chapter of the institution’s Annual Report. Which can be considered the next logical step in digital archiving and asset transfer.
An infrastructure within which multiple registries — each with a specific use case — can coexist, interconnected by application programming interfaces “to ensure interoperability as well as promote financial inclusion and a level playing field,” we must insist.
“This reduces the need for manual interventions and reconciliations that come with the traditional separation of messaging, clearing and settlement (in today’s payment system), eliminating delays and uncertainty. The ledger also supports simultaneous and instantaneous settlement (of transactions), which reduces settlement times and credit risks. Settlement in central bank money ensures uniqueness of currency and finality of payment,” using its own balance sheet as the ultimate means of settlement.
Internationally, the concern for the substitution of digital currencies and the questions of compatibility, interconnection and integration within an interface between national payment systems remained to be addressed. “The concept of a unified ledger does not mean a single ledger that eclipses all other systems in the economy. Depending on the needs of each authority, several registers, each with a specific use case, could coexist”, answers the economic adviser of the BRI.