The ECB’s Position on Tokenization Has Become Clear: The Requirement to Settle with Central Bank Money

In the European Central Bank’s latest Macroprudential Bulletin, the topic of tokenization is discussed extensively. The ECB’s stance is interesting: it acknowledges the potential of the technology, but sets very clear rules.

In short, the ECB says that efficiency could be improved through tokenization. In particular, it emphasizes that central bank money must remain usable at the settlement layer. They do not want a system based on commercial bank money or entirely private tokens. This is actually quite reasonable—central bank money needs to play a role for financial stability and market security.

The bulletin also mentions that distributed ledger technology (DLT) could strengthen the European Union’s savings and investment union. It could reduce operational friction, reduce the number of intermediaries, and simplify automation. In theory, it looks very promising. But do you know what the ECB’s main concern is? Fragmented platforms.

If each platform operates in isolation, the benefits of tokenization are lost. Efficiency gains depend on infrastructure that can work smoothly across different systems. In other words, integration is critical. Too many people overlook this.

There are interesting findings in the tokenized bond market. Early data suggests that credit costs could decrease, and bid-ask spreads are also narrower. However, the ECB notes that these benefits are, for now, temporary and conditional. We need to wait for the market to develop on a broader scale.

As for tokenized funds and euro stablecoins in money markets, the ECB is more cautious. These tools can replicate liquidity and run risks, while also introducing new operational weaknesses. MiCA-compliant stablecoins could reshape demand for government bonds, function as liquidity reserves, or become a new channel for bank contagion. The outcome depends on how those making investment and reserve decisions manage these instruments.

In conclusion, the ECB’s message is clear: tokenization has technological potential, but it requires appropriate regulation and central bank money to be involved. Otherwise, market fragmentation and new risks could emerge. Europe is seriously thinking about this.