Antoine Martin, member of the governing board at Swiss National Bank, spoke with OMFIF about tokenisation for the Digital assets 2024 report. He explained that tokenised assets are still in a niche, but their growth relies on the private sector finding valuable use cases that drive adoption.
OMFIF: Our Digital assets 2024 survey indicates a strong preference from market participants to be able to settle tokenised securities transactions in central bank money. Can you expand on the SNB’s work in this area?
Antoine Martin: Financial institutions prefer to settle virtually all large-value transactions in central bank money. This is true for both traditional and tokenised financial transactions. From a financial stability perspective, this preference is welcome as private-sector actors can hardly create and maintain a stable and efficient monetary system on their own.
Only a central bank can provide risk-free money. Just like traditional financial instruments, tokenised financial instruments require a means of payment that is widely accepted and has a stable value. To understand risks and benefits, the SNB has worked with market participants and field experts to explore the suitability of three models for settling tokenised assets with central bank money. Through experiments, pilots and analysis, we investigated a wholesale central bank digital currency, a real-time gross settlement link and bankruptcy-remote private money.
The wholesale CBDC, a tokenised form of central bank money issued by SNB, is integrated directly into the distributed ledger technology infrastructure. This tight integration allows for secure and efficient atomic settlement. The RTGS link synchronises the RTGS system and the DLT platform that settles tokenised securities using the delivery-versus-payment mechanism. We learned that, while it is possible to exchange money and goods simultaneously on a DvP basis in distinct infrastructures, the challenge is coordinating processes across sometimes disparate systems.
The bankruptcy-remote private money enables integrated settlement, like the wholesale CBDC. In contrast to the wholesale CBDC, this form of money is private-sector Swiss franc token money, but privileged under bankruptcy law. It is structured legally in such a way that, in the event of bankruptcy of the token issuer, it would have a risk profile comparable to that of central bank money.
All three models raise operational, legal and policy questions. These policy questions concern, for example, the requirements for third-party platforms, the risks of liquidity fragmentation arising from the issuance of a wholesale CBDC or bankruptcy-remote money and the governance needed around these settlement arrangements.
OMFIF: Can you give your thoughts on the future role of central securities depositories in the market?
AM: Today, financial market infrastructures are typically tailored to a specific type of asset and specific use cases, including payments systems, securities settlement systems and currency settlement systems. In the case of CSDs, their four core economic functions have remained largely unchanged over the years, despite significant technological advancements, such as the dematerialisation of securities. These functions comprise issuance, central safekeeping of securities, mobilisation and processing of securities’ events.
With tokenisation, this might change. Tokenisation may enable the consolidation and settlement of various types of assets on a single platform in the future – including money as a settlement asset.
Furthermore, tokenisation could bring efficiency gains. Standardised representation in digital form can simplify the process of issuing, transferring and storing securities. The automation of business processes through smart contracts could lead to further efficiency gains. Finally, a uniform, tamper-proof database could simplify the recording of asset values across FMIs and internal systems of financial institutions.
OMFIF: What do you think the journey to DLT becoming a widespread market utility looks like?
AM: Currently, tokenised assets on DLT platforms are still in a niche. The few existing regulated DLT platforms, such as SIX Digital Exchange in Switzerland, have little economic significance at this stage. Like every financial market, tokenised asset markets are driven by network effects. Novel platforms can only generate the necessary gravity if they can demonstrate their innovation potential against existing arrangements. This is why the SNB has decided to support private sector innovation through the issuance of a wholesale CBDC.
The adoption of tokenised asset markets within the regulated financial system will be driven by a multitude of factors. These include expected efficiency gains, new business opportunities, better risk mitigation and robust legal and regulatory frameworks. On the other hand, hindering factors include significant up-front investment expenditures, non-trivial coordination problems among market participants and the prevailing lack of harmonisation of legal and regulatory frameworks on an international level. Also, decisions made by central banks regarding the cost of settlement in central bank money on token platforms will influence the spread of tokenisation in the financial system.
OMFIF: What is your perspective on the different blockchain architectures (private, permissioned, public…)?
AM: The design of DLT platforms may or may not impose access restrictions, and it may provide users with varying degrees of participation in the consensus process for transaction and data validation.
Hence, all DLT architectures and individual projects must be carefully analysed by the central bank to ensure that they meet requirements for the issuance and use of central bank money as a settlement asset, including central bank legal, operational and governance requirements.
For public, permissionless DLTs, it must be ensured that the required controls by the central bank can be implemented, for example, on access to central bank money for the settlement of transactions between involved parties. Technical solutions may be possible, as demonstrated by Project Mariana, however, more work will be needed.
OMFIF: What do you feel the central bank’s role should be in shaping the trajectory of capital markets development?
AM: As long as tokenised asset markets are economically of little significance, settlement in central bank money is not strictly required. However, central banks may support innovation by providing a safe and efficient settlement asset. The success of tokenised markets depends crucially on the drive and innovation of the private sector and whether the potential benefits materialise. The private sector needs to find the interesting and valuable use cases that will drive adoption.
Ideally, central banks will support the innovation efforts of the private sector by enabling settlement in wholesale CBDCs, like the SNB is doing with the Helvetia pilot. The pilot enables the wholesale CBDC settlement of tokenised asset transactions on the SDX platform until at least June 2026. This provides planning certainty for the private sector, while maintaining options for the SNB to exit the platform if the desired success of the platform does not materialise.
This conversation was published in OMFIF’s Digital assets 2024 report.
