"The role of tokenization in the financial system of the future"

Tokens not only carry information about the asset they represent but also embed rules governing their operation that specify what can and cannot be done with them. This functionality, combined with their integration into programmable platforms, simplifies transaction processes that traditionally would require complex message chains and operations across multiple systems. Additionally, the use of smart contracts enables the automatic execution of multiple transactions once predefined conditions are met. 

Tokens not only carry information about the asset they represent but also embed rules governing their operation that specify what can and cannot be done with them

In securities markets, tokenization enables the issuance of bonds on a single platform, their exchange in the secondary market, and automated payment of interest and principal by the issuer. Similarly, in trade finance, payments from a buyer to an international seller can be automatically triggered as the seller achieves specific milestones in the delivery process, such as shipment of goods from a port.

For tokenization to reach its full potential, it is essential that various types of tokens can coexist and integrate on the same platforms. These include tokens representing financial assets, such as bonds or loans, as well as tokenized money. This integration enables the seamless, automatic, and simultaneous execution of transactions, such as the purchase or sale of a bond alongside the respective payment.

The tokenization of money includes both commercial bank-issued money, which is predominantly used by individuals and businesses for payments, and central bank-issued money, which facilitates interbank settlements and wholesale transactions. This has given rise to concepts such as tokenized bank deposits and wholesale central bank digital currencies (wCBDCs). wCBDCs, in particular, enable the integration of the final settlement step (using central bank money) into distributed ledger technology (DLT) platforms, maximizing the benefits of the technology while maintaining the current structure of the monetary system.

In this technological framework, the Bank for International Settlements (BIS) has proposed the concept of "unified or shared ledgers." These are common platforms where various types of tokens coexist, and all the information required to execute financial transactions simultaneously is stored in one centralized location.

Tokenization, combined with the development of common platforms, forms the foundation for designing the financial infrastructure of the future. These ideas are already being explored through numerous initiatives and projects of varying scales. While most efforts remain geographically or institutionally limited, the "Agorá Project" stands out as a groundbreaking initiative. Spearheaded by the Bank for International Settlements (BIS) and the Institute of International Finance (IIF), it involves the central banks of seven key currency areas (Mexico, the United States, the United Kingdom, Europe, Switzerland, Korea, and Japan) along with over 40 private-sector financial institutions, including Spain's three largest banks. This global initiative aims to develop a technical prototype for cross-border wholesale payments, leveraging a programmable platform that integrates tokenized money issued by both commercial and central banks.

Tokenization, combined with the development of common platforms, forms the foundation for designing the financial infrastructure of the future

Looking forward, tokenization and the development of new financial infrastructures face several challenges that must be addressed to progress effectively. First, there is a need for greater regulatory clarity regarding the treatment and legal status of tokenized bank deposits, ensuring they are considered equivalent to traditional deposits. Secondly, existing regulations governing tokenized financial instruments and financial market infrastructures must be further adapted to provide the market with improved certainty and confidence.

Additionally, central banks should strongly commit to wholesale CBDC projects, which offer clear benefits by leveraging tokenization and DLT technology. Unlike retail CBDCs, such as the digital euro, wholesale CBDCs maintain the current functioning of the financial system and banking intermediation, mitigating potential risks to financial stability. It is also crucial to define the roles and responsibilities between the public and private sectors in emerging infrastructures and determine the appropriate technology and degree of decentralization. Striking a balance between innovation, efficiency, and security is key. Lastly, as projects multiply and technological advancements continue, convergence toward common infrastructures and standards will be critical to prevent fragmentation and to achieve the scale necessary for any financial market to thrive.