Isabel Schnabel: Central banks on-chain

Isabel Schnabel reflects on central banks' role in tokenized finance during the Jackson Hole Economic Policy Symposium. Tokenization, a key application of distributed ledger technology (DLT), allows financial assets and money to be represented as digital tokens on programmable platforms. Schnabel highlights the potential benefits of tokenization for the euro area, such as fostering integration and enabling assets and settlement to operate on common infrastructures.

She discusses three key questions raised by Duffie's paper. First, whether central bank money is critical for the development of tokenized finance or if well-designed stablecoins can take over this role. Schnabel concludes that stablecoins are heavily reliant on central bank money, reflecting central banks' ability to provide liquidity.

Second, she questions whether central bank money should remain outside distributed ledger platforms or become native programmable assets. Schnabel argues that central banks should embrace DLT and go on-chain themselves to preserve central bank money's role in settlement and leverage programmability for modernizing monetary policy, collateral management, and liquidity provision.

The third question Schnabel addresses is how central banks should go on-chain. She suggests that the answer depends on the trade-off between a more unified infrastructure for tokenized financial markets versus a smaller number of large ledgers. While a unified infrastructure reduces interoperability and fragmentation issues, it also poses challenges for resilience, innovation, and governance.

Tokenization offers atomicity and programmability, which eliminate settlement risk and enable automated, conditional settlement through smart contracts. These benefits are particularly significant in cross-border transactions and across time zones, reducing operational frictions and improving collateral mobility and availability.

Tokenization also impacts market participation, lowering barriers for infrastructure providers, firms, and investors. It enables fractional ownership, allowing investors to gain exposure to assets that would otherwise be indivisible or require substantial minimum investments. In the euro area, tokenization can help integrate the fragmented financial infrastructure, creating an ecosystem designed for integration rather than being stitched together across national systems.