ECB prepares to invest own funds in tokenized securities

The European Central Bank has begun preparing to invest a small portion of its own funds in tokenized securities. The transactions will settle in central bank money through Pontes, a newly launched Eurosystem service. In an announcement on Monday, the ECB said the purchases would help it gain practical experience as an investor and build institutional expertise in distributed ledger technology in financial markets. The bank said direct investment would provide experience across the full investment lifecycle, including trade execution, settlement, systems and portfolio management. Initial purchases will focus on tokenized, euro-denominated securities issued by euro-area governments, public agencies and European supranational institutions. These assets are conventional securities, such as bonds, that are issued or recorded on a distributed ledger. The investments will come from the ECB's own-funds portfolio, which is a non-monetary-policy portfolio that generates income to help cover operating expenses unrelated to the bank's supervisory duties. The ECB has not disclosed the exact amount it plans to invest or when purchases will begin. Its Executive Board will determine the operational details and timing after the preparatory work is complete, taking into account developments in tokenized issuances and Europe's broader tokenized financial ecosystem. Pontes is part of a Eurosystem strategy to make central bank money fit for the digital age. It will operate alongside Appia, an initiative developing a blueprint for a tokenized financial ecosystem in Europe. The ECB said Pontes would allow market participants, including those involved in exploratory work, to further enhance their services while preserving the anchoring role of central bank money. The bank said Pontes would combine three tested systems into one service. The service will allow transactions to settle with cash tokens or through the Eurosystem's T2 payment system. Its Hash-Link protocol will synchronize asset transfers and payments, while automated processing will reduce manual work. Public and private institutions are pursuing similar projects. In May, JPMorgan filed for a tokenized Ethereum money-market fund. In June, New York Life Investment Management introduced a tokenized bond fund. Earlier this month, India launched a pilot to issue and settle tokenized corporate bonds using its wholesale digital rupee.