What role will central banks play when tokenised finance goes mainstream?

By Admin

20 May, 2025

As traditional investment products increasingly migrate to the blockchain, the financial world is undergoing a seismic shift. Tokenised finance — once a fringe concept driven by techno-anarchists and crypto enthusiasts — is now knocking on the doors of the mainstream. This evolution raises a critical question: What role will central banks play in a world where the centuries-old foundation of double-entry bookkeeping may become obsolete?

The Shift from Centralisation to Decentralisation

Cryptocurrencies like Bitcoin emerged with the idealistic goal of liberating financial systems from the grip of centralized institutions — including central banks. While that libertarian dream hasn’t quite panned out, the technology behind crypto has found enthusiastic adopters in the very institutions it aimed to disrupt. Traditional banks and asset managers are embracing blockchain to revolutionize how investments are created, managed, and distributed.

Apps like Robinhood have already lowered the barriers to entry for retail investors. Now, Millennials and Gen Z are challenging old norms. They question why elite investment opportunities — such as private equity or private credit in unicorn startups — are limited to the wealthy, rather than the everyday users who actually support those businesses.

Fractionalised Finance: No Longer a Dream

Fractionalised finance, once an ambitious idea, is rapidly becoming reality. Franklin Templeton, for instance, recently launched Singapore’s first retail tokenised fund. This product mirrors a traditional money-market instrument but exists on a blockchain. For as little as $20, individuals can gain exposure to an asset class that was once reserved for high-net-worth individuals.

Similarly, KKR & Co. brought its Health Care Strategic Growth Fund to the blockchain three years ago, paving the way for alternative assets to become more accessible through tokenisation.

The Transformation of Money Itself

Not only have investment assets embraced tokenisation, but money itself is undergoing a digital metamorphosis. Stablecoins, like Tether’s USDT, already act as blockchain-based equivalents of the US dollar, facilitating crypto transactions. Major banks are now exploring stablecoin applications beyond crypto trading. Standard Chartered plans to issue a tokenised Hong Kong dollar, HSBC has tokenised gold, and discussions are underway about tokenising traditional bank deposits.

A New Playing Field for Central Banks

Historically, financial systems have relied on accounts and ledgers — rooted in Luca Pacioli’s 1494 invention of double-entry bookkeeping — to track the ownership and movement of money and securities. Central banks emerged around 350 years ago to place a reliable, centralized authority at the top of this system, providing monetary stability.

But tokenised finance challenges these foundations. Distributed ledger technology enables the creation of digital tokens that represent legal claims on money or assets, without the need for account-based systems. These tokens are controlled by whoever holds the cryptographic key, and their functionality can be automated through smart contracts — eliminating layers of intermediaries.

The Efficiency Gains Are Real — But So Are the Risks

Tokenised finance offers undeniable operational advantages. For example, shifting pension savings into a new fund — a process that traditionally involves multiple stakeholders and days of back-and-forth communication — can now be completed in just two days with blockchain. Cross-border currency exchanges can occur instantaneously.

However, this new financial architecture raises major questions about the future of central banking. If tokenised assets and currencies replace traditional money and securities, how will central banks conduct monetary policy? Can they still manage inflation, calm market panics, or inject liquidity in times of crisis? Will the tools they’ve used for centuries — such as setting interest rates on reserves or executing open market operations — remain effective?

Recognizing the urgency of these questions, the Bank for International Settlements and the innovation center of the New York Federal Reserve have launched collaborative efforts to explore the implications of a tokenised financial future.

Conclusion: Reinvention or Redundancy?

As tokenised finance marches toward mainstream adoption, central banks stand at a crossroads. They must either adapt to this decentralized, cryptographically controlled ecosystem or risk becoming obsolete. While the technological tide cannot be stopped, it’s clear that the world still needs institutions that can ensure stability, trust, and governance — even if their methods must undergo a radical transformation.

The future of finance is being rewritten — and central banks will need to decide whether they are the authors or just footnotes in this new chapter.