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Throughout history, developments in the monetary system and society at large have been closely interwoven. This interplay has been a story of one side pulling the other, leading to dramatic leaps in economic activity over time. On the one hand, the evolving needs and demands of society have spurred the monetary system to adapt. On the other hand, key innovations in money and payments have unleashed latent demand for new types of economic activity that have led to dramatic spurts of economic growth and development.
The rapid expansion of trade and commerce over the past 500 years would be scarcely imaginable if buyers and sellers still had to cart around heavy chests full of metal coins to pay for goods and services. The advent of money in the form of book entries on ledgers overseen by trusted intermediaries opened the door to new financial instruments that bridged both geographical distance and the long lags between the delivery of goods and settlement of payments.1 With the advent of the electronic age, paper ledgers became digital, adding impetus to the "dematerialisation" of money as well as claims on financial and real assets. Electronic bookkeeping accelerated paper-based processes, allowing accounts to be updated at the speed of light. Through dematerialisation and digitalisation, the interplay between money and the economy has wrought profound changes on society at large.
Today, the monetary system stands at the cusp of another major leap. Following dematerialisation and digitalisation, the key development is tokenisation – the process of representing claims digitally on a programmable platform. This can be seen as the next logical step in digital recordkeeping and asset transfer. Tokenisation could dramatically enhance the capabilities of the monetary and financial system by harnessing new ways for intermediaries to interact in serving end users, removing the traditional separation of messaging, reconciliation and settlement. Tokenisation could unlock new types of economic arrangement that the frictions inherent in the current monetary system have hitherto made impractical.
Crypto and decentralised finance (DeFi) have offered a glimpse of tokenisation's promise, but crypto is a flawed system that cannot take on the mantle of the future of money.2 Not only is crypto self-referential, with little contact with the real world, it also lacks the anchor of the trust in money provided by the central bank. While stablecoins have mushroomed to fill this vacuum by mimicking central bank money, the implosion of the crypto universe in the past year shows that there is no substitute for the real thing. Away from crypto, efforts by commercial banks and other private sector groups have explored the capabilities of tokenisation for real-world use cases. But these efforts have been hampered by the silos erected by each project and the resulting disconnect from other parts of the financial system. These projects also lack integration with a tokenised version of the settlement asset in the form of a central bank digital currency (CBDC)....
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