Central banks are exploring how smart contracts could support monetary policy in financial systems where money and assets are tokenised.

Project Pine, a joint research initiative by the Federal Reserve Bank of New York’s Innovation Center and the Bank for International Settlements (BIS) Innovation Hub Swiss Centre, tested whether central banks could use smart contract-based tools to carry out core functions in such an environment.

The project developed a prototype smart contract toolkit capable of performing monetary policy operations, including paying interest on reserves, conducting asset purchases and sales, swapping assets, and temporarily exchanging reserves for collateral.

These functions were tested in hypothetical scenarios based on past market events, such as interest rate changes, quantitative easing and tightening, and periods of market stress.

According to the BIS report, the toolkit proved “fast and flexible.”

In one scenario, a central bank was able to update collateral criteria and exchange liquid for illiquid collateral within ten minutes.

The smart contracts also allowed for the immediate deployment of a new facility offering reserves and changing interest rates on those reserves.

The study found that smart contracts could give central banks greater flexibility and speed in adjusting or introducing policy tools.

However, the impact of tokenisation on central bank operations would vary depending on how financial systems are structured and how widely tokenisation is adopted.

Project Pine marks an early step in understanding how blockchain technology might fit into central banking.

The report notes that more technical work and policy coordination are needed before such systems can be adopted at scale.

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