The European Central Bank is studying several ways to adapt central bank money to tokenised financial markets. Isabel Schnabel has presented three possible models for linking bank reserves to infrastructures based on blockchain or other distributed ledgers. In each, the ECB intends to preserve the euro’s role as the benchmark settlement asset while preparing new services, including the Pontes system, which is already operational.
Tokenisation involves representing an asset as a digital token recorded on a programmable infrastructure. This development is of interest to central banks, financial institutions and market operators because it could make it possible to transfer assets and settle their payment more quickly and in a more coordinated manner.
For the ECB, the challenge is not limited to transferring existing financial instruments onto a blockchain. It also involves determining how central bank money could be used in these new environments. During a presentation in London, Isabel Schnabel, a member of the institution’s Executive Board, outlined three possible models. These options are also presented in the ECB’s work on the evolution of market infrastructures.
Faster settlement and more connected markets
In a traditional system, the transfer of an asset and the corresponding payment may rely on separate procedures, sometimes managed by different infrastructures. Tokenisation could bring these operations closer together and make it possible to execute them simultaneously: the asset and the payment would be transferred in a coordinated manner, provided the systems concerned are designed to allow this.
This automation could reduce certain settlement delays and make transactions easier to manage. It could also help limit the fragmentation of European markets, where platforms and systems coexist but do not always communicate easily with one another. Interoperability between these networks remains a key issue, however: the value of a tokenised market will also depend on the ability of different participants to exchange assets and payments seamlessly.
This discussion forms part of a broader debate about the uses of digital money and the different forms it can take. To distinguish between bank money, digital assets and crypto-assets, an introduction to Bitcoin and digital money helps put the ECB’s projects in context: money issued or guaranteed by a central bank does not have the same status as a private digital asset.
Three models for linking reserves to tokenised infrastructures
Bank reserves are funds that commercial banks hold with their central bank. In the Eurosystem’s current system, they are used in particular for settlements between institutions. The question the ECB is examining is how these reserves could be used in transactions involving tokenised assets without changing the essential role of central bank money.
Issuing reserves directly on a programmable ledger
The first model under consideration would involve recording central bank reserves directly on a programmable infrastructure. The ECB would then provide commercial banks with a tokenised form of central bank money, held and transferred on the ledger in question.
This option would bring reserves closer to the platforms on which tokenised assets are issued or traded. Payments could therefore be executed within a single digital environment. It would nonetheless raise questions about design and operation: the conditions for accessing the ledger would need to be defined, the security of transactions ensured and continuity with the Eurosystem’s existing infrastructures guaranteed.
Keeping reserves in current systems and using a gateway
The second scenario would keep reserves within the Eurosystem’s current systems. A gateway would connect these systems to platforms based on distributed ledger technology, or DLT. It would coordinate the payment in central bank money with the transfer of the asset recorded on the platform.
Under this model, central bank money would remain off-chain, while assets could circulate on a distributed ledger. The aim would be to synchronise the two movements to prevent an asset from changing ownership without the corresponding payment being made, or vice versa. This approach relies more heavily on existing infrastructures, but its effectiveness would depend on the reliability and speed of the connections between systems.
Involving a private intermediary
The third option would rely on a private entity. It would deposit reserves with the central bank and issue tokens backed by those funds in exchange. Holders of these tokens would have a claim against the intermediary that issued them, rather than a direct claim on the ECB.
This model could allow private companies to offer instruments that can be used on tokenised infrastructures while relying on reserves held with the central bank. It would, however, require a clear distinction between the nature of the different forms of money and the associated responsibilities. The backing of the tokens, redemption arrangements and the issuer’s soundness would be key factors in user confidence.
Preserving the two-tier monetary system
Whichever model is chosen, the ECB says it wants to preserve the two-tier monetary system. The central bank provides benchmark money to banking institutions, while those institutions offer deposits, credit and other services to their customers. Tokenisation could change the infrastructures used for payments and trading without necessarily transforming this structure.
In a tokenised environment, several forms of money could circulate side by side: central bank money, tokenised bank deposits and stablecoins issued by private entities. The ECB attaches particular importance to their convertibility. One euro should retain the same value whether a payment is made through a centralised system or a distributed ledger. This equivalence helps maintain the singleness of money within the euro area.
The debate connects with discussions about the sovereignty and autonomy of European infrastructures. The role of blockchain in digital sovereignty and the work on the digital euro illustrates the focus on controlling technologies and payment systems. More broadly, European digital initiatives are emerging in various sectors, such as the social network W, presented as a European alternative to X. These projects are in different fields, but they are part of a context in which the question of European digital infrastructures is taking on growing importance.
Pontes is already putting central bank money settlement into practice
The ECB’s work has moved beyond the theoretical stage. The Pontes system has been operational since 21 September and enables transactions involving tokenised assets to be settled in central bank money. It connects DLT platforms to the Eurosystem’s TARGET services, which process wholesale payments in central bank money, among other things.
The system is therefore exploring a practical way to connect market platforms based on distributed ledgers with the Eurosystem’s settlement services. To learn more about this service and how it works, see this overview of Pontes, the ECB’s new blockchain service.
The connection between these environments is intended to make it possible to settle transactions while retaining central bank money as the payment asset. Pontes is therefore a step towards experimentation and implementation, while the three models outlined by Isabel Schnabel set out several possible architectures for the future. The system’s operation must also be assessed in terms of security, service availability and the ability to process transactions across different platforms.
Appia is preparing the architecture for a tokenised financial market
In parallel, the Appia project is working on the design of a future tokenised European financial market. This is not simply a matter of adopting a technology, but of defining a framework in which networks, platforms and financial instruments could work together. This architecture will need to specify, in particular, how participants exchange assets, settle transactions and manage collateral.
Several questions remain open. Interoperability between networks must enable different infrastructures to communicate. Monetary policy will need to be taken into account in an environment where new forms of money are circulating. The management of collateral and the processing of cross-border transactions will also need to be adapted to the characteristics of tokenised assets.
Digital governance is another issue, particularly with regard to access rules, data protection and the allocation of responsibilities among operators. Debates about users’ rights in online environments, such as those addressed in the CNIL review of access rights on social media, concern a different sector but illustrate the importance of establishing clear rules for digital services.
The ECB plans to publish a comprehensive blueprint for this ecosystem in 2028. This document will set out the proposed organisation of tokenised financial infrastructures and the conditions needed for them to operate at the European level. Until then, experiments such as Pontes and the design work carried out under Appia will inform decisions on settlement models, connections between platforms and the role of central bank money.
