The next-generation monetary and financial system explores the evolution of money and finance, emphasizing the role of tokenization in enhancing financial services. It discusses how central banks can leverage innovative technologies to create a unified ledger that integrates various financial assets, including central bank reserves and commercial bank money. This system aims to improve the efficiency, accessibility, and security of financial transactions while maintaining trust and integrity in the monetary framework. The report is essential for policymakers, financial institutions, and researchers interested in the future of digital currencies and financial infrastructure.

Key Points

  • Explores the role of tokenization in modernizing financial systems.
  • Discusses how central banks can implement a unified ledger for financial transactions.
  • Analyzes the importance of trust and integrity in the next-generation monetary system.
  • Highlights the potential benefits of integrating central bank reserves with commercial bank money.
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38 pages
Accounting
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Accounting
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77BIS Annual Economic Report 2025
III. The next-generation monetary and financial system
Introduction
The story of the monetary system, and its role in the economy, is one of continuous
evolution. Throughout history, technological progress in the monetary system has
gone hand in hand with major leaps in economic activity. The innovation of money
recorded as book entries managed by trusted intermediaries gave rise to new
financial instruments that helped trade and commerce flourish. Paper ledgers gave
way to digital ones, bringing profound changes to the economy and society.
The past several years have seen a wave of digital innovation that opens up
unprecedented possibilities for money and finance. This chapter discusses how
central banks can light the path to the next generation of the monetary and financial
system. This is a system designed to expand the quality, scope and accessibility of
financial services by leveraging innovative technologies backed by sound regulation,
while preserving the solid foundation of the existing system: central bank reserves as
a trusted final settlement asset, supporting private financial sector innovation.
At the heart of this vision is the concept of tokenisation, the process of recording
claims on real or financial assets that exist on a traditional ledger onto a programmable
platform. Tokenisation represents the next logical progression in the evolution of the
monetary and financial system, as it enables the integration of messaging, reconciliation
and asset transfer into a single, seamless operation. Its potential lies in its ability to
knit together operations encompassing money and other assets that would reside
on the same programmable platform. This could be made possible by a new type of
financial market infrastructure – a “unified ledger” – which may or may not use
distributed ledger technology (DLT).
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By bringing together tokenised central bank
reserves, commercial bank money and financial assets into the same venue, a unified
ledger can harness tokenisation’s full benefits.
Tokenisation is poised to both improve the old, by overcoming the frictions and
inefficiencies of the current architecture, and enable the new, by opening up new
contracting possibilities. In cross-border payments, tokenisation could replace the
complex chain of intermediaries and the sequential updating of accounts in today’s
correspondent banking transactions with a single, integrated process. Together with
state-of-the-art compliance tools made available on the platform, tokenisation would
thereby reduce operational risks, delays and costs. Similarly, it would enhance capital
Key takeaways
• Tokenisation represents a transformative innovation to both improve the old and enable the new. It
paves the way for new arrangements in cross-border payments, securities markets and beyond.
• Tokenised platforms with central bank reserves, commercial bank money and government bonds at
the centre can lay the groundwork for the next-generation monetary and financial system.
• Stablecoins offer some promise on tokenisation but fall short of requirements to be the mainstay of
the monetary system when set against the three key tests of singleness, elasticity and integrity.
78 BIS Annual Economic Report 2025
markets by enabling the contingent execution of actions in terms of collateral
management, margining adjustments and delivery-versus-payment arrangements.
Core to this vision of the future is trust in money. The foundation of any monetary
arrangement is the ability to settle payments at par, ie at full value. Money is
information-insensitive in that agents use it with “no questions asked”, ie without due
diligence. In this way, money underpins coordination in the economy through
common knowledge of its value by all agents, just as a common language coordinates
social interactions. If this common knowledge fails, so does coordination, and the
monetary system becomes unmoored, with large societal costs. Common knowledge
of the value of money has a shorthand – the “singleness of money” – where money
can be issued by different banks and accepted by all without hesitation. It does this
because it is settled at par against a common safe asset (central bank reserves)
provided by the central bank, which has a mandate to act in the public interest.
In addition to singleness, practical considerations suggest two further tests for
viability as the backbone of the monetary system. One is elasticity, referring to money
being provided flexibly to meet the need for large-value payments in the economy,
so that obligations are discharged in a timely way without gridlock taking over.
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The
other is the system’s integrity against financial crime and other illicit activity.
Modern real-time gross settlement (RTGS) systems are the canonical example of
the need for elasticity. In a two-tier banking system, the central bank is ready to provide
reserves to financial institutions elastically at the policy rate against high-quality
collateral. When needed, the central bank can provide intraday settlement liquidity
so that transactions can be settled in real time. Banks, in turn, can decide how much
money (in the form of deposits) they want to provide to the real economy. Importantly,
in a two-tier banking system banks can issue money without full bank reserve
backing, whether in the form of gold or silver coins (as was the case in gold- or
silver-backed monetary regimes) or as bank reserves (as is the case in today’s fiat
currency regime). The sheer size of payment values in a modern economy means
that carting gold and silver coins, maintaining cash piles or retaining large holdings
of pre-funded accounts to discharge obligations are simply impractical – they would
be recipes for payment system gridlock.
Another concrete manifestation of elasticity is the banking system’s role in
creating money through lending activities, including overdrafts and lines of credit.
Through overdrafts, payments with values that exceed deposit balances can be made
at the payer’s discretion, while lines of credit provide liquidity on demand. This allows
complex interlocking obligations in the economy to be discharged in a timely manner.
The third test is that of the integrity of the monetary system against illicit activity.
This imperative flows from the recognition that a monetary system that is open to
widespread abuse from fraud, financial crime and other illicit activities will not
command trust from society or stand the test of time. Considerations of monetary
sovereignty (the ability of a jurisdiction to make decisions and exercise influence over
the monetary system within its borders) in the face of potential currency substitution
raise related issues.
Measured against the three tests, today’s two-tier monetary system, with the
central bank at its core, stands above other models in ensuring that money is fit for
purpose. Central banks provide the highest form of money, support settlement
finality and ensure stability and trust in the unit of account. Commercial banks and
other private sector entities provide crucial services to support economic activity
within and across borders, facilitating the means of payment that support economic
transactions. There is, no doubt, considerable room for improvement in the current
system. The vision outlined here gives a glimpse of what is possible. Nevertheless, the
merits of the core architecture of the system with the central bank at its centre should
be recognised and preserved.
79BIS Annual Economic Report 2025
The next-generation monetary system with central bank reserves at the core
promises to deliver far-reaching benefits. A key step towards this transformation is
the trilogy of tokenised central bank reserves, tokenised commercial bank money
and tokenised government bonds, all residing on a unified ledger. Together, these
elements could form the foundation of a vibrant tokenised financial system, unlocking
new efficiencies and capabilities. Tokenised central bank reserves provide a stable
and trusted settlement asset for wholesale transactions in a tokenised ecosystem,
ensuring the singleness of money. They could also enable monetary policy
implementation on a tokenised platform. Tokenised commercial bank money could
build on the proven two-tier system, offering new functionalities while preserving
trust and stability. Tokenised government bonds, as the cornerstone of financial
markets, could enhance liquidity and support various financial transactions, from
collateral management to monetary policy operations.
The role that cryptoassets and stablecoins will ultimately play in the next-generation
monetary and financial system is an open question. Crypto instruments operate on
strikingly different principles to those of the conventional monetary system. They
strive to redefine money according to a decentralised notion of trust by repudiating
intermediaries in favour of peer-to-peer transactions. In spite of this initial promise,
unbacked crypto coins have given rise to an ecosystem where a new breed of
intermediaries operating hosted wallets (ie cryptoasset wallets for which a third-party
provider manages private keys and assets) play the dominant role. Moreover, with
their large price gyrations, they do not resemble a stable monetary instrument, but
rather a speculative asset.
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Stablecoins were designed as a gateway to the crypto ecosystem, promising
stable value relative to fiat currencies (overwhelmingly the US dollar) while operating
on public blockchains. As a transaction medium in the crypto ecosystem, and due in
part to their backing mechanism, they exhibit some attributes of money. Their
pedigree in the crypto ecosystem has also led to use cases as on- and off-ramps to
cryptoassets and, more recently, as a cross-border payment instrument for residents
in emerging market economies lacking access to the dollar. However, stablecoins
perform poorly when assessed against the three tests for serving as the mainstay of
the monetary system.
As digital bearer instruments on borderless public blockchains, stablecoins have
been the go-to choice for illicit use to bypass integrity safeguards. The pseudonymity
of public blockchains, where individual users’ identities are hidden behind addresses,
can preserve privacy but also facilitates illegal use. The absence of know-your-customer
(KYC) standards like those of the traditional financial system exacerbates this issue.
4
The
bearer nature of stablecoins allows them to circulate without issuer oversight, raising
concerns about their use for financial crime, such as money laundering and terrorism
financing. While demand for stablecoins may persist, they perform badly against the
integrity test at the system level.
Stablecoins also fare poorly on singleness and elasticity. As digital bearer
instruments,
they lack the settlement function provided by the central bank. Stablecoin
holdings are tagged with the name of the issuer, much like private banknotes circulating
in the 19th century Free Banking era in the United States. As such, stablecoins often
trade at varying exchange rates, undermining singleness. They are also unable to fulfil
the no-questions-asked principle of bank-issued money. Their failure on elasticity stems
from their construction: they are typically backed by a nominally equivalent amount of
assets, and any additional issuance requires full upfront payment by holders, which
undermines elasticity by imposing a cash-in-advance constraint.
Stablecoins raise a number of other concerns. For one, there is an inherent
tension between their promise to always deliver par convertibility (ie be truly stable)
and the need for a profitable business model that involves liquidity or credit risk.
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FAQs

What is tokenization and how does it impact finance?
Tokenization is the process of converting real or financial assets into digital tokens on a programmable platform. This innovation allows for seamless integration of various financial operations, including messaging, reconciliation, and asset transfer. By enabling a unified ledger, tokenization can significantly reduce operational risks and costs associated with traditional financial transactions. It also opens up new possibilities for automated financial contracts and enhances the efficiency of cross-border payments.
What are the key tests for a viable monetary system?
A viable monetary system must pass three key tests: singleness, elasticity, and integrity. Singleness ensures that money can be accepted universally without hesitation, while elasticity refers to the system's ability to provide liquidity flexibly to meet payment demands. Integrity involves safeguarding against financial crime and ensuring that the monetary system commands public trust. These principles are crucial for maintaining a stable and effective financial environment.
How do central banks play a role in the next-generation financial system?
Central banks are positioned as key players in the next-generation financial system by providing the foundational assets and regulatory frameworks necessary for a tokenized ecosystem. They can facilitate the development of a unified ledger that integrates various forms of money and financial assets, ensuring trust and stability. Additionally, central banks can support public-private partnerships to foster innovation and experimentation in digital finance. Their leadership is essential for guiding the transition to a more efficient and inclusive monetary system.
What challenges do stablecoins face in the monetary system?
Stablecoins encounter several challenges, including issues related to singleness, elasticity, and integrity. They often lack the universal acceptance required for effective money, as their value can fluctuate based on the issuer's creditworthiness. Additionally, stablecoins typically cannot expand their supply elastically, requiring full upfront payment for new issuances. Concerns around their potential use for illicit activities further undermine their integrity within the financial system, making it difficult for them to serve as a reliable monetary instrument.
What innovations are suggested for improving cross-border payments?
The report suggests that a next-generation correspondent banking system utilizing tokenization and a unified ledger can streamline cross-border payments. By merging payment instructions and account updates into a single transaction, this system can enhance efficiency and reduce settlement risks. It also proposes the use of smart contracts for automated compliance checks and transaction monitoring, which can significantly improve the speed and reliability of international financial transactions.

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