Central banks are exploring smart contracts to execute monetary policy in tokenized ecosystems, indicating a rising interest in merging blockchain technology with conventional finance (TradFi).
As per a collaborative research study conducted by the Federal Reserve Bank of New York’s Innovation Center and the Bank for International Settlements (BIS) Innovation Hub Swiss Centre, smart contracts might provide central banks with adaptable, quick-response mechanisms within a tokenized financial landscape.
The analysis, known as Project Pine, evaluated a prototype “generic customizable monetary policy token toolkit” intended for subsequent examination by central banks, as outlined in a BIS report released on May 15.
“The smart contract toolkit proved to be quick and adaptable,” noted the BIS. “In theoretical scenarios, the central bank was capable of adding and altering tools instantaneously.”
The report highlighted that if tokenization gains widespread acceptance for currency and securities, smart contracts could be pivotal in executing monetary policy.
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This signifies a “initial step” in demonstrating the potential advantages of tokenization for central banks, according to the BIS.
The framework’s “speed and consistency” was “validated” during a 10-minute hypothetical scenario where central banks swiftly modified collateral requirements and traded liquid collateral for illiquid during periods of declining collateral values.
Furthermore, the smart-contract framework enabled central banks to introduce a new facility for reserves and adjust interest rates on those reserves with “instant” execution.
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Smart contracts and tokenization might assist central banks
According to the BIS report, smart contracts and tokenization technology could aid central banks in their swift response to “extraordinary occurrences”:
“This rapidity, along with the capability to modify any of the parameters at any moment, provides central banks with adaptability in reacting to unexpected events and rapidly evolving crises.”
While optimistic, the report also recognized that central banks are likely to encounter infrastructure hurdles, as most existing systems are not configured for these sophisticated applications.
Project Pine utilized Ethereum’s ERC-20 token standard in conjunction with another standard for “access control.”
Financial institutions have progressively embraced tokenization in recent times.
During the Consensus 2025 conference, Joseph Spiro, product director at DTCC Digital Assets, described stablecoins as the “ideal” financial instrument for real-time collateral management concerning financial transactions like loans or derivatives.
