NEW YORK—The Federal Reserve Bank of New York and the Bank for International Settlements (BIS) today published a joint research study that explored if and how central banks could continue to implement monetary policy operations in hypothetical tokenized wholesale financial markets.
Project Pine, from the New York Innovation Center at the New York Fed and the Swiss Centre of the BIS Innovation Hub found that central banks could customize and deploy policy implementation tools using programmable smart contracts in a potential future state where commercial banks and other private sector financial institutions have widely adopted tokenization for wholesale payments and securities settlement.
The project generated the prototype of a generic monetary policy implementation tokenized toolkit for potential further research and development by central banks across jurisdictions and currencies. The prototype was designed to be technically modifiable for different central banks’ monetary policy frameworks and calibrated to conduct standard or emergency market operations.
The toolkit prototype was created in consultation with central banks’ financial markets advisors from multiple jurisdictions, who helped outline the project scope and specific design requirements. It is not particular to any currency or jurisdiction. It can fulfill a common set of central bank implementation requirements, including paying interest on reserves, open market operations, and collateral management.
The toolkit was tested against ten hypothetical scenarios simulating normal market dynamics and stress events. Each scenario was designed using historical data inputs on past market events, such as interest rate tightening and easing cycles, quantitative easing and tightening cycles, and periods of strained market liquidity or broader market disruptions.
The prototype successfully responded and instantaneously carried out the intended operation under the varying market conditions, consistent with the central bank’s desired liquidity environment. Project Pine's findings highlighted areas for further research and analysis related to interoperability and data standardization. Project Pine aims to contribute to a broad and transparent public dialogue regarding potential applications of new technologies in the financial sector.
BIS Innovation Hub projects are experimental in nature and aim to explore and deliver public goods to the global central banking community. Project Pine was limited to research and experimentation and should not be interpreted to reflect any policies, directives, or views of the Federal Reserve Bank of New York or the Federal Reserve System.
About the New York Innovation Center
The New York Innovation Center (NYIC) at the Federal Reserve Bank of New York bridges the worlds of finance, technology, and innovation. Established in 2021 in partnership with the Bank for International Settlements Innovation Hub, the NYIC generates insights into high-value central bank-related opportunities through research, analysis, and technical experimentation to drive advancements in central banking and enhance the functioning of the global financial system.
About the BIS Innovation Hub
The BIS Innovation Hub aims to foster international collaboration on innovative financial technology within the central banking community. It identifies and develops in-depth insights into critical trends in technology affecting central banking, develops public goods for improving the functioning of the global financial system, and serves as a focal point for a network of central bank innovation experts.
Contacts
Federal Reserve Bank of New York
Shelley Pitterson
(917) 698-0510
Shelley.Pitterson@ny.frb.org
Bank for International Settlements
Louise Egan
+41 61 280-8293
louise.egan@bis.org
