The ECB puts central bank money on the ledger

Every tokenised bond has the same weak point, and it is the cash. The security can move on a ledger in seconds. The money that pays for it has had to be a stablecoin, a bank's tokenised deposit, or a conventional payment that settles on a different system at a different time. The Eurosystem has now offered a fourth option.

Pontes, which went live on 21 September, lets wholesale transactions in tokenised assets settle in central bank money. It connects market distributed-ledger platforms to the Eurosystem's TARGET services, CoinDesk reported, so the cash leg of a trade recorded on a ledger is paid in the same money banks use to settle with each other.

The launch group is substantial. The ECB lists fourteen market participants: ABANCA, BayernLB, Caisse des Dépôts et Consignations, Cecabank, Deutsche Bank, Deka Bank, DZ Bank, the European Investment Bank, KfW, Memo Bank, NRW.BANK, Santander, Société Générale and the Deutsche Bundesbank. There are four ledger operators: Axiology, Cashlink, Clearstream and SWIAT. More participants have committed to connect in the coming months.

Christine Lagarde gave the plainest description when she briefed finance ministers at the Eurogroup on Friday: "it's a digital euro made available for banks so that they can transact amongst themselves using tokenized assets and distributed ledger technology." Piero Cipollone, the executive board member who leads the work, said Pontes "brings the stability and trust of central bank money to the European tokenised finance ecosystem."

The design is also a policy choice. A tokenised market needs a settlement asset. If the central bank does not provide one, private tokens will fill the gap, and in practice the most liquid private tokens are denominated in dollars. By offering wholesale settlement in central bank money, the Eurosystem gives European banks a reason to keep euro tokenised markets on a euro cash leg that carries no issuer risk.

The limits are set out in the ECB's own announcement. Pontes starts with a core set of services. Enhanced features and longer operating hours are to come gradually, with full implementation expected by 2028. For now, then, it does not provide the round-the-clock settlement that is one of tokenisation's main selling points. Appia, the Eurosystem's longer-term blueprint for an integrated ledger ecosystem, is also due by 2028.

Other central banks are taking different routes to the same problem. Hong Kong has committed to testing tokenised Exchange Fund Bills and moving its tokenised-deposit pilot to 24/7 settlement in central bank digital currency. Singapore's banks have netted tokenised deposits on a shared ledger while the money still moved the old way. Europe has chosen to bridge existing ledgers to its existing payment system rather than build a new one.

The ECB has also said it will invest part of its own funds in tokenised securities and settle those purchases through Pontes. That makes the central bank one of its own first customers. The measure of success will be volume, and in particular whether issuers of euro tokenised bonds start naming Pontes as their settlement route instead of a stablecoin.