Central Banks Test Blockchain for Monetary Policy

Why are central banks exploring blockchains?

Central banks aren’t entering the world of blockchain simply as a fad; they’re doing so because every part of the monetary system, from settlement rails to asset-busting, is gradually being rewritten in code.

The financial industry is already tokenizing money market funds, government bonds, and even bank deposits. According to the Atlantic Council, 134 jurisdictions are exploring or testing a central bank digital currency (CBDC), up from just 35 in 2020.

At the same time, commercial banks are warning that if they cannot move tokenized deposits between public blockchains such as Solana or private ledgers like R3 Corda, risk being left behind.

From a central bank's perspective, there are two important questions:

• Can I still perform traditional operations such as open market purchases, standing facilities and reserve compensation if reserves and government bonds become smart tokens?
• Can monetary transmission improve when policy logic is built into code?

These questions are driving pilots such as Project Pine, Singapore's Project Guardian, the Bank of England's wholesale CBDC sandbox and Japan's multi-year retail CBDC pilot.

What is “tokenized” monetary policy?

Tokenized monetary policy means that the liabilities and assets that a central bank uses to control short-term interest rates exist as programmable tokens on a distributed ledger platform.

In such a token arrangement, as described by the BIS, an ecosystem operates where money and securities share a common ledger, with monetary functions performed through smart contracts, replacing the traditional batch files of real-time gross statutory settlement (RTGS) systems.

In practice, each policy instrument is expressed as a code:

• Interest on reserves becomes an automated coupon credited to a wallet address once a block closes.
• Repurchase and reverse repurchase agreements are contingent asset exchanges that self-liquidate at maturity.
• Collateral haircuts are numerical parameters that the central bank can adjust in real time, with changes propagated instantly to all counterparties.

Project Pine demonstrated all of these applications using ERC-20 tokens for reserves and securities on a permissioned Ethereum-compatible blockchain.

But how does tokenized monetary policy differ from traditional monetary policy?

Traditional policy operations rely on central bank systems such as Fedwire or the Bank of England's RTGS. These systems close overnight, settlements occur in discrete batches and require multiple human approvals.

A tokenized system can settle atomically in seconds, maintain an immutable audit trail, and allow policy changes to propagate without waiting for dealers to post the trades. The BIS report on tokenization highlights that combining assets and settlement on a single ledger can reduce operational risk and latency.

Did you know that? A repo is a short-term securitized loan in which one party sells securities and agrees to buy them back later at a higher price. In contrast, a reverse repo, where the transaction is viewed from the perspective of the counterparty (buying the securities and selling them later).

What is Project Pine?

Project Pine is a research initiative led by the BIS Innovation Hub and the New York Fed that explores how central banks might conduct monetary policy in a future where money and government assets are digital tokens managed on blockchain-like systems.

Launched in late 2024 and published in May 2025, the project built a working prototype, a “starter kit” for central banks, aimed at testing policy tools such as reserve interest rates, repo operations and asset purchases that can be executed using smart contracts.

The project ran simulated financial scenarios, recreating both calm and crisis conditions:

• Normal conditions: The smart contract automatically executed a one-day reverse repo and drained reserves by placing bids at a preset interest rate.
• Liquidity shock: When simulated market pressures pushed interest rates too high, an emergency lending facility automatically kicked in within seconds to stabilize rates.
• Asset Purchase Program: The toolkit accepted bids, calculated allocations, and completed transactions between digital reserves and tokenized bonds instantly.

These scenarios were run in a test environment with simulated commercial banks and a programmable blockchain platform. Everything from interest payments to collateral valuation was automated, providing a glimpse into how monetary policy might function in a 24/7, tokenized financial system.

This was not an isolated experiment. Other central banks are running parallel pilots that explore similar areas with their own approaches:

• Although temporarily offline since May 24, 2025, news reports from MAS show that Singapore's Project Guardian has tested tokenized deposits and government bonds in live repo transactions, demonstrating that interbank settlement can occur on a shared DLT without sending payments via Swift.
• The Bank of England has taken a dual-rail approach. A July 2024 discussion paper highlights that wholesale tokenized money could coexist with RTGS balances, allowing commercial banks to choose the rail that best meets their liquidity needs. Governor Andrew Bailey has warned that if tokenized deposits stagnate, the Bank “must continue to prepare for a wholesale CBDC.”
• On the retail front, Japan’s multi-year program has entered a live “pilot” phase, building an end-to-end infrastructure, from smartphone wallets to a central ledger, capable of processing tens of thousands of transactions per second. The pilot is also exploring privacy-enhancing overlays, reflecting consumer expectations for cash-like anonymity.

Taken together, these pilots confirm that key features such as programmability, real-time visibility, and atomic settlement are no longer theoretical — they work. However, they do not yet answer the more challenging question: How can central banks move an entire financial system onto such infrastructures without disrupting credit creation and intermediation?

Did you know that? Project Pine's digital monetary system is constructed like a three-layer cake: The bottom layer is a programmable blockchain (Besu), the middle layer is filled with tokenized money and assets (such as ERC-20 reserves), and the top layer runs the smart contracts that execute monetary policy actions.

Why is Project Pine important?

Project Pine is the first of its kind to demonstrate that core central bank instruments can be rebuilt using smart contracts.

It proves that:

• Policy instruments can be deployed more quickly, possibly within seconds.
• Facilities such as repos or asset purchases can automatically adjust to changing market conditions.
• Tokenization can streamline operational processes, reduce friction and provide greater flexibility.

Who was involved in the Project Pine experiments?

Seven major central banks, including Australia, Canada, England, Mexico, Switzerland, the EU and the US, worked together to shape the toolkit and define testing requirements. The findings do not commit any of these banks to adopting such systems, but do provide a solid basis for future research and policy.

What did Project Pine test?

To see how well the system works, Project Pine ran tests based on real-world situations, such as raising interest rates or a government debt crisis. Short and long time periods, small and large financial systems, tight and loose monetary conditions, and different types of borrowing (such as bank loans or corporate bonds) were tried. This helped to check whether the system could handle all types of economic fluctuations.

Did you know that? In Project Pine, central bank operations, such as paying interest on reserves or managing collateral, are not performed manually; they are handled by smart contracts coded directly into the top “protocol layer” of the blockchain stack.

Practical Design Issues in Tokenized Monetary Policy

As central banks explore how to place policy instruments on blockchains, they face several significant design hurdles. These are not just technical; they are legal, operational, and even philosophical.

Here are the main challenges:

• Interoperability: Can different blockchains communicate with each other? The current financial system is like a highway with shared rules. However, blockchain ecosystems are more like separate islands, each with its own rules and roads. Public networks like Solana, private ones like Corda, or permissioned platforms like Besu do not always communicate smoothly with each other, which can lead to delays in payments or funds being stuck between platforms. Experts also warn that if too many users gather around one dominant blockchain, it can create an unhealthy concentration that makes the entire system vulnerable.
• Legal purpose: Does blockchain data count legally? Many countries still view blockchain records as evidence of transactions, not legally binding proof of ownership. So even if a tokenized government bond moves on-chain, the law may still require that a separate “golden record” be kept off-chain by a trusted authority. Until legal systems catch up, this split could limit the reach of tokenized finance.
• Cyber ​​resistance: What happens when something goes wrong? Blockchain systems run on code, and that code can contain errors. In a traditional setup, humans can intervene if something breaks. But with smart contracts, “code is law.” That’s why countries like Japan complete backup plans in their pilots. They test how to respond to cyber attacks, technical failures or even bugs in smart contracts, because even a small mistake can have significant consequences in a digital money system.
• Privacy versus transparency: How much visibility is needed? Banks and regulators need transparency to monitor financial risks and prevent crime. But ordinary people want privacy, especially when spending money on everyday purchases. Balancing those two needs is tricky. Policymakers are now experimenting with ideas like layered disclosure (more visibility into large transactions), zero-knowledge proofs (where you can prove something without revealing all the details), and even “anonymous vouchers” that let users make some transactions without being traced.

These challenges aren’t deal breakers, but they do show that making money programmable isn’t as simple as flipping a switch. Central banks need to work closely with regulators, cybersecurity experts, and the financial industry to ensure that tokenized monetary systems are safe, fair, and trustworthy.

The future

The future of tokenized monetary policy will likely evolve in carefully staged phases, balancing innovation with financial stability.

The BIS Innovation Hub lists more than a dozen ongoing tokenization projects, from Australia’s Project Dunbar (a multi-CBDC bridge) to Switzerland’s Project Helvetia (a DLT-based repo). Commercial banks, meanwhile, are moving their rails: HSBC completed its first tokenized-deposit payment in April 2025, and Euroclear is testing blockchain settlement for tokenized bonds.

Central banks face a coordination game: Be too cautious and risk hardening private standards; move too fast and challenge the financing model of commercial banks.

The most likely path is a phased approach:

• 1 phase: Limited wholesale CBDC sandboxes plus tokenized collateral for central bank counterparties.
• 2 phase: Dual-rail environments where RTGS balances and tokenized reserves interoperate via synchronization layers.
• 3 phase: Full adoption of smart contract-based policy instruments, potentially including real-time fiscal transfers.

Like previous shifts such as the rollout of RTGS systems or inflation targeting, which were introduced gradually to test and refine their impact, tokenized systems will be introduced incrementally through pilots, sandboxes, and hybrid models before full adoption occurs.

Whether it will ultimately reshape the way central banks manage the economy remains to be seen.

Frequently Asked Questions

Why are central banks all considering blockchain technology?
Central banks are looking at blockchain technology because it enables the evolution of financial systems, where traditional operations can be optimized through programmability and faster settlements that reduce risk.

What is the use of Project Pine?
Project Pine serves as a prototype to demonstrate the feasibility of managing monetary policy through smart contracts, which can lead to faster and more effective policy implementations.

What are the main challenges facing central banks in implementing tokenized policies?
Key challenges include interoperability between different blockchain platforms, legal recognition of blockchain data, cybersecurity, and balancing privacy and transparency for users.