"Tokenization" – The Next Generation of Currency and Financial Systems?

The latest report from the Bank for International Settlements reveals important directions for the evolution of the monetary and financial system—tokenization technology is laying the foundation for the next generation of currency and financial systems, and highlights significant flaws in stablecoins.

On June 26, according to news from Chasing Wind Trading Desk, the Bank for International Settlements (BIS), known as the "central bank of central banks," recently published the third chapter of its annual economic report, specifically discussing "The next-generation monetary and financial system."

The report outlines a vision for a next-generation monetary financial system centered on tokenization, emphasizing that the "trinity" of central bank digital reserves, commercial bank digital currencies, and government bond tokenization will form the foundation of the future financial system, while stablecoins perform poorly in the three key tests of uniqueness, resilience, and completeness, making it difficult for them to become the mainstay of the monetary system.

Tokenization: The Next Step in the Evolution of the Monetary System

The Bank for International Settlements states that tokenization represents a transformative innovation in the currency and financial system. This technology shifts the recording of asset rights from traditional ledgers to programmable platforms, achieving integrated operations for information transmission, reconciliation, and asset transfer. Through a new financial market infrastructure called the "unified ledger," tokenized central bank reserves, commercial bank currencies, and financial assets can operate on the same platform.

In the field of cross-border payments, tokenization can replace complex intermediary chains and sequential account updates with a single integrated process, significantly reducing operational risks, delays, and costs. In capital markets, tokenization can facilitate collateral management, margin adjustments, and the conditional execution of securities settlement.

The Bank for International Settlements emphasizes that the core advantage of tokenization lies in its ability to achieve "conditional execution," which automatically triggers corresponding operations when specific preconditions are met. The most typical example is "delivery versus payment" (DvP), which ensures that asset transfers and payments occur simultaneously, greatly reducing counterparty risk and minimizing custody requirements.

The report points out that the trinity combination of tokenized central bank reserves, tokenized commercial bank currencies, and tokenized government bonds will form the foundation of a vibrant tokenized financial system.

Tokenized central bank reserves provide stable and reliable settlement assets for wholesale transactions, ensuring currency uniqueness and supporting the implementation of monetary policy on tokenized platforms.

Tokenized commercial bank currencies offer new functionalities based on a mature two-tier system while maintaining trust and stability.

Tokenized government bonds, as the cornerstone of financial markets, will enhance liquidity and support various financial transactions

Central Bank-Led Tokenization Vision

The report states that central banks play a catalytic role in driving the transformation of the financial system. The BIS emphasizes that central banks need to promote change in four ways:

• Clear Vision: Articulate which key features of the current financial system must be replicated in the tokenized ecosystem.
• Regulatory Framework: Provide the necessary regulatory and legal framework to ensure the safe development of tokenized finance.
• Underlying Assets: Provide the basic assets and platforms required for the tokenized financial system, particularly central bank reserves in tokenized form.
• Public-Private Cooperation: Facilitate public-private partnerships, encourage joint experiments, and integrate industry efforts.

The Triple Test of Stablecoins: Poor Performance

The BIS report evaluates whether stablecoins are suitable as the main body of the monetary system using strict standards, finding that stablecoins perform poorly in three key tests of the monetary system.

Singularity Test Failure: As digital promissory notes, stablecoin holders actually hold liabilities of specific issuing institutions. When recipients receive stablecoin payments, they are essentially obtaining "dollars" from different issuers—red dollars, blue dollars, white dollars, etc. Due to the lack of final settlement on a central bank balance sheet, stablecoins often trade at rates deviating from par value, undermining the "no inquiry principle" of money.

Elasticity Test Failure: Stablecoin issuing institutions cannot arbitrarily expand their balance sheets. Any additional issuance requires full payment in advance from holders, creating a strict "cash prepayment" constraint that cannot provide the elastic liquidity support needed for large payment systems. This sharply contrasts with banks' ability to elastically expand their balance sheets within regulatory limits.

Integrity Test Failure: Stablecoins circulate as digital promissory tools on public blockchains, making them susceptible to circumventing integrity safeguards. While the anonymity feature of blockchains protects privacy, it also facilitates illegal use. Stablecoins have become funding tools for criminal and terrorist organizations.

The report also states that the stablecoin market continues to grow rapidly, but is highly concentrated. As of May 30, 2025, the two major stablecoins USDT (Tether) and USDC (Circle) dominate the market. Over 99% of stablecoins are denominated in USD, with cross-border transaction volumes significantly increasing during periods of high inflation and exchange rate volatility.

Stablecoins have a significant impact on the safe asset market. The investment scale of major stablecoins in the U.S. Treasury market is comparable to that of large government money market funds (MMFs). Research shows that a $3.5 billion increase in stablecoin market value can lower Treasury yields by about 2.5-5 basis points, with impacts during redemption periods reaching up to three times.

The BIS mentions in the report that the operational principles of crypto tools are fundamentally different from traditional monetary systems; they attempt to redefine money by eliminating intermediaries and supporting peer-to-peer transactions based on the concept of decentralized trust. Despite these intentions, unbacked cryptocurrencies have given rise to a new intermediary ecosystem—custodial wallets (i.e., crypto asset wallets managed by third parties for private keys and assets) dominate the market. Additionally, significant price volatility makes them less like stable monetary tools and more like speculative assets

Regarding regulation, the Bank for International Settlements stated that for stablecoins, regulatory focus should include appropriate customer identification compliance for custodial wallets, anti-money laundering and counter-terrorism financing compliance, as well as quality supervision of the stabilization mechanism. Some jurisdictions have required stablecoin issuers to obtain authorization from regulatory authorities and establish local registered entities