Central Banks Explore Blockchain for Faster Monetary Policy

Coin WorldTuesday, May 27, 2025 5:10 am ET
3min read

Central banks are increasingly exploring the use of blockchain technology to enhance their monetary policy operations. This shift is driven by the financial industry's move towards tokenizing various assets, including money-market funds, Treasurys, and bank deposits. The Atlantic Council reports that 134 jurisdictions are currently studying or piloting a central bank digital currency (CBDC), a significant increase from just 35 in 2020. Commercial banks are also warning that if they cannot move tokenized deposits across public blockchains or private ledgers, they risk being left behind in the evolving financial landscape.

From a central bank’s perspective, two critical questions arise: First, can traditional operations such as open-market purchases, standing facilities, and reserve remuneration still function effectively if reserves and government bonds become smart tokens? Second, can monetary transmission improve when policy logic is hard-wired into code? These questions are driving initiatives such as Project Pine, Project Guardian in Singapore, the Bank of England’s wholesale CBDC sandbox, and Japan’s multiyear retail CBDC pilot.

Tokenized monetary policy involves the use of programmable tokens on a distributed-ledger platform for the liabilities and assets that central banks use to steer short-term interest rates. In this arrangement, monetary functions are executed by smart contracts, replacing traditional batch file processes used in overnight real-time gross settlement (RTGS) systems. Each policy tool is expressed as code, such as interest on reserves becoming an automated coupon that accrues to a wallet address once a block closes, and repo and reverse-repo agreements becoming conditional asset swaps that self-liquidate at maturity. Project Pine demonstrated these functionalities using ERC-20 tokens for reserves and securities on a permissioned Ethereum-compatible chain.

In contrast to traditional policy operations, which rely on central bank systems like Fedwire or the Bank of England’s RTGS and 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 allows policy adjustments to propagate without waiting for dealers to book trades. The BIS paper on tokenization notes that combining assets and settlement on a single ledger can shrink operational risk and latency.

Project Pine, a research initiative led by the BIS Innovation Hub and the New York Fed, 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 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, and demonstrated that these tools could be deployed faster, possibly within seconds, and adapt automatically to changing market conditions.

Other central banks are also running parallel pilots. Singapore’s Project Guardian has tested tokenized deposits and government bonds in live repo transactions, proving that interbank settlement can occur on a shared DLT without sending payments through Swift. The Bank of England has taken a dual-rail approach, allowing wholesale tokenized money to sit alongside RTGS balances, letting commercial banks pick whichever rail meets their liquidity needs. Japan’s multi-year program has entered a live “pilot” phase, constructing an end-to-end infrastructure capable of handling tens of thousands of transactions per second and exploring privacy-enhancing overlays.

These pilots confirm that key features like programmability, real-time visibility, and atomic settlement are no longer theoretical—they work. However, they do not yet answer the more challenging question of how central banks can transition an entire financial system to such rails without disrupting credit creation and intermediation. Project Pine’s digital monetary system is built like a three-layer cake: the bottom layer is a programmable blockchain, the middle is packed with tokenized money and assets, and the top layer runs the smart contracts that carry out monetary policy actions.

Project Pine is significant because it is the first of its kind to show that core central bank tools could be rebuilt using smart contracts. It proves that policy tools can be deployed faster, possibly within seconds, and that facilities like repo or asset purchases can adapt automatically to changing market conditions. Tokenization could streamline operations, reduce friction, and offer greater flexibility. Seven major central banks, including those of Australia, Canada, England, Mexico, Switzerland, the EU, and the US, collaborated on shaping the toolkit and defining test requirements. The findings provide a solid foundation for future research and policymaking.

As central banks explore moving policy tools onto blockchains, they face several significant design hurdles, including interoperability, legal finality, cyber resilience, and the balance between privacy and transparency. These challenges are not deal-breakers but highlight the complexity of making money programmable. Central banks must work closely with lawmakers, cybersecurity experts, and the financial industry to ensure tokenized monetary systems are safe, fair, and reliable.

The future of tokenized monetary policy will likely unfold in carefully staged phases, balancing innovation with financial stability. The BIS Innovation Hub lists more than a dozen ongoing tokenization projects, and commercial banks are also shifting rails. Central banks face a coordination game: going slow risks private standards hardening around them, while going too fast could upend the funding model of commercial banks. The likeliest path is a phased approach, starting with limited-scope wholesale CBDC sandboxes and tokenized collateral for central-bank counterparties, moving to dual-rail environments, and ultimately to full adoption of smart-contract-based policy tools. Just as earlier shifts like the rollout of RTGS systems or inflation-targeting regimes were introduced gradually, tokenized systems will be phased in through pilots, sandboxes, and hybrid models before full-scale adoption. Whether it ultimately reshapes how central banks manage the economy remains to be seen.