Core Focus: The macro-monetary implications of tokenization, including the potential obsolescence of traditional money holdings, the unbounded velocity of money, and the implications for central banks’ monetary policy mandates.

In-Depth Notes:
The tokenization of financial assets has profound implications for the nature of money, the velocity of circulation, and the ability of central banks to conduct monetary policy. These implications challenge traditional assumptions about the role of money in the economy and the tools available to central banks.

The Obsolescence of Traditional Money Holdings:
A leading analysis argues that tokenization and instant financial transactions could make traditional money holdings obsolete . Money’s value stems from transaction frictions—the delays and costs of converting assets into purchasing power. As tokenization enables near-instantaneous, frictionless conversion between interest-bearing securities and money, people would no longer need to hold money balances in advance of payments . Instead, they would convert assets to money just-in-time for transactions and immediately back again, causing money holdings to shrink toward zero while money velocity becomes unbounded .

Implications for Banking:
This transformation would fundamentally reshape banking, blurring the lines between banks and investment funds, as money transitions from being a store of value to merely a transient settlement instrument within transaction flows . Traditional deposit-based banking could be challenged by a model where money is only held transiently, and investment products that offer liquidity and yield could become the primary vehicles for storing value. This would have implications for the stability of bank funding, the cost of credit, and the structure of the financial system.

Implications for Monetary Policy:
The transformation of money has significant implications for the central bank’s mandate . The foundational principles for CBDCs emphasise that any introduction should support wider policy objectives and do no harm to monetary and financial stability . Core features of any future CBDC system must be resilient and secure to maintain operational integrity, convenient and available at very low or no cost to end users, underpinned by appropriate standards and a clear legal framework, and have an appropriate role for the private sector, as well as promoting competition and innovation . Central banks have a duty to safeguard people’s trust in money, and technology must serve rather than undermine these foundational principles .

The Central Bank Mandate in the Tokenized Era:
The tokenization of finance raises fundamental questions about the role of central banks in a system where money holdings are minimal and velocity is unbounded. Central banks would need to develop new tools for conducting monetary policy, as traditional tools based on the demand for money may become less effective. The BIS and other international bodies are actively exploring these questions, with the recognition that the speed of innovation in payments and money-related technologies requires the prioritisation of collaborative experimentation . Central banks must complement their domestic efforts with close cooperation to guide the exploration of tokenization and CBDCs to identify reliable principles and encourage innovation