- Schnabel: Central bank money should become a natively programmable asset on DLT to ensure settlement and monetary policy in tokenised finance.
- Stablecoins cannot replace central bank reserves, as they lack the ability to elastically expand liquidity during financial stress.
- Project Pontes launches in Q3 2026 with a Eurosystem-operated DLT platform for settling DLT-based transactions in central bank money.
- Project Appia explores architectures from a single unified European ledger to multiple interconnected DLT networks for the euro area's tokenised financial ecosystem.
- Project Hangang in South Korea has tested a unified ledger where central bank money and assets settle atomically on the same platform.
The Speaker and Context
Isabel Schnabel, Member of the Executive Board of the ECB, delivered a speech on 28 August 2026 at the Jackson Hole Economic Policy Symposium on "Financial Innovation: Implications for Payments and Policy." The speech responds to Darrell Duffie's paper "Tokenized Finance and the Perimeter of Central Banking" and addresses three central questions: whether central bank money is critical for the development of tokenised finance, whether central banks should bring their money directly onto distributed ledger platforms, and how such an architecture should be designed.
"Stablecoins are dominated by settlement solutions based on central bank money, reflecting in part the unique ability of central banks to elastically provide liquidity." – Isabel Schnabel
The Benefits of Tokenisation for the Euro Area
Tokenisation of financial assets brings two key benefits: atomicity — the legs of a transaction settle together or not at all, thereby eliminating settlement risk — and programmability — settlement can be made conditional on a set of rules that are executed automatically via smart contracts.
Schnabel notes that the euro area already achieves a degree of atomicity through TARGET2-Securities (T2S), where delivery-versus-payment (DvP) is standard for securities trading. Tokenisation, however, makes such programmability general-purpose: market participants themselves can define conditions spanning the entire lifecycle of a financial instrument — from the initial exchange of cash and collateral to collateral substitution, margin management, and the return of collateral at maturity.
The benefits are particularly pronounced in cross-border transactions. Since collateral often has to be pre-positioned overnight, cross-border repo transactions require significant prefunding. Programmable settlement could largely eliminate this operational friction and improve the mobility and availability of collateral.
On the supply side, tokenisation can lower barriers to entry for both infrastructure providers and firms. France's "Lightning Stock Exchange" (Lise) illustrates how tokenisation can support new trading venues tailored to smaller companies. On the demand side, tokenisation enables fractional ownership, allowing investors to gain exposure to assets that would otherwise be indivisible or require substantial minimum investments, such as fractional ownership in a gold bar or real estate.
For the euro area as a whole, tokenisation offers a route to a financial ecosystem that is integrated by design — in contrast to the current fragmented network of national central securities depositories. This aligns with the objectives of the European savings and investments union and the recommendations of the Draghi report on European competitiveness.
Stablecoins Cannot Replace Central Bank Money
Schnabel emphasises that modern fiat monetary systems are built on a two-tier structure: central banks issue the ultimate settlement asset (central bank money), while commercial banks issue money-like claims that circulate at par. This architecture emerged to solve coordination, trust, and stability problems exposed by centuries of experimentation with private money.
During the American "Free Banking" era, state-chartered banks issued their own notes, resulting in a fragmented monetary system in which notes traded at substantial discounts — especially when issued by distant, less-trusted banks. This experience led to the current arrangement in which banks settle claims on one another using the liabilities of the central bank, which stands outside the private credit hierarchy and carries no credit or liquidity risk.
Two fundamental criteria must be met by any settlement asset:
- Safety — free of credit, liquidity, and redemption risk
- Elastic supply — the ability to expand liquidity in response to changes in liquidity demand
Duffie's proposal of a floating-rate government security-backed coin could, in principle, satisfy the first criterion — it could be designed in an almost perfectly safe way with zero credit and duration risk. But a stablecoin issuer has no independent capacity to meet the second criterion: the ability to expand liquidity elastically, especially during periods of stress when funding markets experience strains and confidence shifts abruptly.
"Stablecoins are best understood as complements to central bank money, not substitutes for it. No matter how advanced the technology or how deep the liquidity of private tokens, financial markets can only scale safely if transactions settle in a risk-free asset that can be supplied elastically." – Isabel Schnabel
The history of the Federal Reserve Act of 1913 illustrates the point: under the National Banking System, the money supply was tied to bank holdings of eligible government bonds, meaning liquidity could not expand smoothly to meet surges in demand for cash — a weakness that aggravated the banking panic of 1907, when call money rates rose to approximately 95 per cent.
Central Banks Should Go On-Chain
Schnabel identifies three possible models for making central bank money available in a tokenised environment:
| Model | Description | Consequence for central bank money |
|---|---|---|
| Direct issuance | Tokenised reserves issued directly on a programmable ledger | Reserves are natively tokenised |
| Bridge/synchronisation | Existing payment systems linked to DLT platforms via bridging solutions | Reserves remain outside the tokenised ecosystem |
| Private intermediary | A private institution tokenises reserves on behalf of the central bank via an omnibus account | The token is a private claim backed by central bank reserves |
Schnabel argues against the omnibus model because it recreates a pyramid of private claims, where the value of the circulating settlement asset depends on the continued operational, financial, and legal soundness of the intermediary. The central bank is reduced in this model to a passive balance sheet counterparty and gatekeeper.
If, by contrast, the central bank issues tokenised reserves itself, it can conduct monetary policy natively on the DLT platform using smart contracts. Project Pine — a joint research study by the New York Federal Reserve and the BIS Innovation Hub — has demonstrated that smart contracts can make monetary policy implementation more nimble and efficient. A standard repo operation could be executed atomically, and rules governing collateral management could be incorporated directly into the settlement process. Smart contracts could automatically request additional collateral, substitute securities in real time, or apply differentiated remuneration rates.
"Smart contracts could make monetary policy implementation more flexible by allowing central banks to create new operational facilities and adjust parameters such as interest rates, collateral requirements and access conditions with immediate effect." – Isabel Schnabel
The Architecture Dilemma: One Unified Ledger or Multiple Interconnected Networks?
The Eurosystem's long-term work programme under Project Appia is exploring a spectrum of possible architectures for the euro area's tokenised financial ecosystem:
- A single unified European ledger: Central bank money, commercial bank money, and financial assets are brought onto a common infrastructure. The benefits of atomicity and programmability are maximised. Project Hangang under the leadership of the Bank of Korea has started and successfully tested such a unified ledger in South Korea.
- A Eurosystem-operated ledger connected to private DLT networks: The Eurosystem issues tokenised reserves on its own DLT platform, which is then connected to market DLT platforms.
- Multiple interconnected ledgers: An ecosystem of multiple interconnected ledgers hosting both central bank reserves and financial assets.
Schnabel highlights a central trade-off: a more unified infrastructure via a single ledger or a small number of large ledgers reduces issues of interoperability and fragmentation, but creates challenges for resilience, innovation, and governance. Who is liable if a smart contract fails? How are new participants admitted? Who decides on software upgrades and confidentiality rules?
Pontes: From Bridge to Native Tokenisation
Project Pontes combines a synchronisation mechanism, connecting TARGET Services with market DLT platforms, with a Eurosystem-operated DLT platform for settling DLT-based transactions in central bank money. At the launch in Q3 2026, legal settlement finality for the cash leg will still be anchored in the TARGET2 system, but will ultimately be on the Eurosystem DLT platform itself. Smart contracts and 24/7 operations are planned enhancements after the initial launch.
Although the name "Pontes" (bridges) suggests a bridge solution, the project goes far beyond synchronisation: it brings native tokenisation and programmability onto the Eurosystem's own platform and allows the ECB to extend its operational perimeter into tokenised markets.
In January 2026, the Eurosystem took a first step in this direction when marketable assets issued in central securities depositories using DLT were accepted as eligible collateral for Eurosystem credit operations.
Traditional and Tokenised Finance Will Coexist
Regardless of the architecture that ultimately prevails, traditional and tokenised financial systems will likely operate side by side for a significant period. To contain the resulting fragmentation of liquidity, central banks will need to ensure that banks can manage their liquidity seamlessly across both environments — for example, by reducing the frictions from differences in operating hours and settlement cycles. The need to hold liquidity buffers separately in the two environments could otherwise generate additional liquidity demand and hamper efficiency.
"The greater the interoperability across platforms and environments, the lower the risk of fragmentation – and the weaker the case for shifting to a single, fully integrated platform." – Isabel Schnabel
Conclusion
Tokenisation has the potential to fundamentally reshape wholesale financial markets. The benefits are likely to be particularly pronounced in the euro area, where tokenisation could not only improve market efficiency but also help overcome the long-standing fragmentation of European financial infrastructures.
Private markets, however, cannot unlock the full potential of tokenisation on their own. For tokenisation to take off, a safe and scalable settlement asset is indispensable — and this is best provided by central banks themselves. To reap the full benefits, central banks need to go on-chain: bringing central bank money into the tokenised environment and modernising the tools of policy implementation. This is precisely the direction in which the ECB is heading with its Pontes and Appia projects, paving Europe's path towards a tokenised financial system.