The Federal Reserve Bank of New York, along with six other central banks, will team up with the Bank for International Settlements (BIS) to test using tokenization as a way of increasing the speed and integrity of cross-border payments.
Under the name Project Agora, the goal is to ease international payments in the face of different legal, regulatory, and technical requirements, as well as different operating hours and time zones. According to the BIS, This initiative holds the potential to bolster the monetary system’s functionality while introducing innovative solutions through smart contracts and programmability, all while upholding its two-tier structure.
Tokenization is the process of creating digital tokens, such as cryptocurrencies, on a blockchain to represent assets, including financial instruments. The technology offers several benefits, including greater simplicity within the financial system, faster settlement, and a potential reduction in fraud. It’s essentially a more efficient and transparent way of approaching value movement than banks do now.
A Continuing Process
BIS, the central bank for central banks, has been exploring tokenizing deposits through its Innovation Hub. Over the past few years, it has been focused on creating a wholesale stablecoin for central and international banks to settle with each other. Through Project Agora, the BIS will also be partnering with a group of private financial companies to explore combining tokenized central bank money with commercial bank deposits on a unified, programmable platform.
Project Agora follows on the heels of an initiative called “Tokenise Europe 2025,” which the European Commission and the German Banking Association launched in February 2023. Its objective is to leverage the potential of asset tokenization and distributed ledger technology to increase competitiveness and build economic resilience in Europe. More than 20 banking trade groups and fintechs throughout Europe joined to support the initiative.
“Project Agora is a continuation of testing and experimentation the BIS has been doing for quite some time regarding tokenization,” said James Wester, Director of Cryptocurrency and Co-Head of Payments at Javelin Strategy & Research. “It’s a further indication that the tokenization of assets, and the efficiencies that tokenization encourages, are evolving quickly.”
Long-term, the BIS’ tokenization efforts for cross-border payments show that central banks are eager to take advantage of the benefits of digital currencies. “In effect, it’s a continuing validation of the idea of ‘digital assets,’ meaning digital tokens attached to currencies, equities, and contracts,” Wester said.
