BIS, NYIC, Investigate Monetary Policy in a Tokenised World

The Federal Reserve Bank of New York and the Bank for International Settlements (BIS) today published a joint research study that explored if and how central banks could continue to implement monetary policy operations in hypothetical tokenised wholesale financial markets.   

The study covers the results of Project Pine, from the two bodies, that found that central banks could customise and deploy policy implementation tools using programmable smart contracts in an environment where commercial banks and other private sector financial institutions have widely adopted tokenisation for wholesale payments and securities settlement.

The project generated the prototype of a generic monetary policy implementation tokenised toolkit for potential further research and development by central banks across jurisdictions and currencies. The prototype was designed to be technically modifiable for different central banks’ monetary policy frameworks and calibrated to conduct standard or emergency market operations.

The toolkit prototype was created in consultation with central banks’ financial markets advisors from multiple jurisdictions, who helped outline the project scope and specific design requirements. It is not particular to any currency or jurisdiction, and can fulfill a common set of central bank implementation requirements, including paying interest on reserves, open market operations, and collateral management.

The toolkit was tested against 10 hypothetical scenarios simulating normal market dynamics and stress events. Each scenario was designed using historical data inputs on past market events, such as interest rate tightening and easing cycles, quantitative easing and tightening cycles, and periods of strained market liquidity or broader market disruptions. 

“The prototype successfully responded and instantaneously carried out the intended operation under the varying market conditions, consistent with the central bank’s desired liquidity environment,” the NYIC and BIS state. “Project Pine’s findings highlighted areas for further research and analysis related to interoperability and data standardisation.”

While the two bodies observe that Project Pine aims to contribute to a broad and transparent public dialogue regarding potential applications of new technologies in the financial sector, there is the usual disclaimer that it does not signal future policy. They add that the project was limited to research and experimentation, something that is unsurprising given the current US administration’s antipathy to central bank digital currencies in particular.

The full paper can be accessed here.