By Michael Hunter
Alongside the international institutions of the international system, the world’s monetary guardians are defining their approach to this latest financial frontier. Detailed preparations for a new era in cross-border payments are underway, covering the ground where global commerce and geopolitics often intersect.
This is the story of how the most influential organisations are preparing for a major digital transformation. There are a variety of strategies in place and under development. Each involves stablecoin-style payments for the transactions at the wholesale level of finance – across borders and between central banks – taking the blockchain beyond retail-level transactions between individual users. The technology, already established and in use for retail stablecoins, could help make cross-border payments faster and cheaper. Such transactions currently depend on the global correspondent banking network. It can be cumbersome, time-consuming and costly. To accept payment, a bank requires an account with an institution within the jurisdiction from where the transaction originates. Without that, a third party is required. This is often a bank where both parties to the transaction have accounts.
Ending the paper wait
This is an aged system, often reliant on paperwork and underpinned by the SWIFT interbank messaging system. Regulatory oversight in each country can delay settlement times. Each transaction can depend on a web of bilateral relations, while being loaded with fees, making the system cumbersome and exposing it to geopolitical turbulence. Tokenisation offers a route around many of these legacy problems with international payments. And it works electronically, dramatically reducing settlement times, even making them instantaneous. All required transactions can be recorded simultaneously in the same blockchain ledger, rather than moving in turn from one jurisdiction to another. Regulatory oversight could also be integrated into the process, significantly speeding it up.
Central banks are aware of the benefits. The extent to which they are open to change and prepared for it is uneven. The Federal Reserve in the US recently held a landmark conference covering tokenisation last October, the first event of its kind at the United States central bank covering innovative digital finance. For one day, the Payments and Digital Asset Innovation Conference brought together experts and regulators to “consider a broad range of perspectives on how to further innovate and improve the payment system”.
Fed’s token message
Christopher J. Waller, a member of the Fed’s board of governors, opened the gathering and said it was intended “to send a message that this is a new era for the Federal Reserve in payments” and that “payments innovation moves fast, and the Federal Reserve needs to keep up.”
As the world’s most influential central bank, the Fed has been careful around financial innovation and tokenisation, giving Waller’s pledge and the conference itself particular resonance. He outlined “a possible prototype” for a Fed payment account. It will come with limits as Washington’s monetary authorities take careful steps into a digital future. “I sometimes call it a ‘skinny’ master account,” Waller said, adding it “would provide access to the Federal Reserve payment rails while controlling for various risks to the Federal Reserve and the payment system.” But interest would not be paid on balances and balance caps may be imposed. The accounts would also not qualify to borrow from the Fed’s discount lending window, a key part of US financial architecture, or have access to all of the Fed’s payment services. Waller said “the payments landscape, as well as the types of providers, has evolved dramatically in recent years, and, accordingly, a new payments account could better reflect this new reality.”
ECB’s bridge and road to the future
The European Central Bank has also adopted twin initiatives regarding what it refers to as distributed ledger technology (DLT), namely the arrival of tokenisation and blockchain in international payments. Both have Latin names that reflect the intention behind each. Pontes, meaning 'bridge,' for instance, is designed for the near term. Later this year, it will link new payment methods to Europe’s existing settlement infrastructure, called TARGET, short for Trans-European Automated Real-time Gross settlement Express Transfer. The ECB says Pontes will offer a “Eurosystem DLT-based solution, linking DLT platforms and TARGET Services to settle transactions in central bank money from the third quarter of 2026”.
Appia, named after the famous Roman road, the Appian Way, has ambitions that stretch into the future. The ECB says it will head toward an innovative and integrated payments and securities ecosystem in Europe that also facilitates safe and efficient operations at the global level. It aims for “interoperability and standardisation” to establish “compatibility between applications across the value chain”.
Bank of England’s sandbox
The Bank of England has already set up what it calls “the regulatory framework” to “enable the private sector to set up trading venues and settlement systems for tokenised assets”. And according to Sarah Breeden, deputy governor for financial stability, the UK’s so-called “Digital Securities Sandbox” will be “real-world transactions in tokenised securities, and market participants will interact with these trading venues and settlement systems in the same way as they do in the conventional financial system. “These won’t merely be prototypes or experiments,” she said in a speech at DC Fintech Week last October.
“Market participants will interact with these trading venues and settlement systems in the same way as they do in the conventional financial system.”
She said the BOE has 15 firms “preparing with regulators to launch trading and settlement venues” as early as 2026, “ranging from established financial firms [including] Euroclear, HSBC, JP Morgan and the London Stock Exchange Group … to new players, and across the full range of asset classes [including] equities, corporate and government bonds, and investment funds including real estate funds.”
The Bank of International Settlements (BIS) – the Swiss-based self-styled “bank of central banks” – has also repeatedly pledged its support for innovation. Andréa M Maechler, deputy general manager of the BIS, told the Singapore Fintech Festival in November that “understanding the technology behind tokenisation, together with the opportunities and risks it presents, is crucial”. She added:
“This requires identifying the fundamental principles that foster trust and stability and understanding how these translate in a tokenised ecosystem. Tokenisation turns static records of financial assets into verifiable digital tokens that can operate on programmable platforms. The programmability and composability of tokenised platforms mean that multiple steps and transactions can be automated and bundled, enabling major efficiency gains and entirely new contracting possibilities.”
BIS’ Project Agorá
The BIS runs a pioneering initiative, Project Agorá, exploring tokenisation for central banks. Named after the Greek word for marketplace, it aims to speed up settlement times.
Seven central banks have signed up, including the Federal Reserve Bank of New York, the Bank of France, the ECB, the Bank of England, and the Bank of Japan. Mexico and South Korea are involved, as is the Swiss National Bank. They are working alongside what the BIS calls a “large group of private financial firms convened by the Institute of International Finance (IIF).”
Maechler explained:
“It combines tokenised deposits and tokenised reserves on a programmable platform, thereby enabling the bundling of multiple steps involved in a cross-border payment in one seamless atomic transaction, including the settlement in central bank money.”
But tokenisation also comes with implications of its own. Western institutions have dominated the international financial system. The dollar is the world’s reserve currency, under US control, giving Washington extra political leverage through sanctions. The European Union’s dominance of the still-essential SWIFT system, given its domicile in Belgium, gives Brussels' international measures similar heft. During times of increasing geopolitical uncertainty, any moves away from these established mechanisms could become more controversial and delayed.
The BIS, long seen as the lead advocate of innovation, has hit problems with previous efforts. Its “mBridge” initiative, dating back to 2021, looked to distributed ledger technology as a means of international payment avoiding SWIFT and the dollar. It was backed by China, Hong Kong, the United Arab Emirates, Saudi Arabia and Thailand. In October 2024, the BIS itself pulled out of the scheme after Russia called for a similar system to be used among the nations of the BRICS bloc, predominantly from the Global South, but dominated by Moscow and Beijing. The renewed effort from the BRICS was widely seen as a potential means around sanctions and the call from the Kremlin came amid sanctions imposed after its invasion of Ukraine in 2022.
IMF’s flash crash warning
The International Monetary Fund has added a note of caution to the discourse on tokenisation in global finance. The 191-member organisation is designed to prevent crises in the global financial system and to advise members on policies for stable economic growth, while also acting as a lender to nations in emergencies. In a video posted on social media, the IMF warned that the increased speed of tokenised transactions may deepen the risk of “flash crashes”, or sudden, steep and dramatic falls in asset prices as markets fragment at times of crisis. Itai Agur, senior IMF economist said: “Specific policies may be needed for tokenisation to really deliver on its promise while limiting the risks.” He pointed to the prospect of more attention from political authorities, alongside the actions of monetary institutions:
“Governments have rarely been content to stay on the sidelines during important evolutions of money. So If history is any guide, they may take a more active role in the future of tokenisation”.
The Bank of Japan is moving at pace among the major global economies toward a fully developed tokenised financial ecosystem. It was the first major economy to adopt a law covering stablecoins in June 2023. The legislation was widely seen as a key step toward the tokenisation of a range of assets, setting clear, detailed rules. A digital yen is already being piloted. The BOJ has compared account-based and token-based versions of the currency. Other major central banks remain in the design or consultation phases of using blockchain-style technology to back a digital version of the national currencies. Central Bank Digital Currencies – CBDCs – may prove to be the ultimate test for globalised and tokenised assets. They are likely to take time to develop. Plans toward a CBDC in the US were halted by executive order in January 2025. In the meantime, moves toward tokenised international payments are in the spotlight as investors prepare for the next phase of global finance.
Michael Hunter is an experienced markets and investment writer who’s worked for the FT and Bloomberg, amongst others, over the last 25 years.
