Central banks are experimenting with smart contracts to implement monetary policy in tokenized environments, signaling a growing interest in integrating blockchain technology into traditional finance (TradFi).
According to a joint research study by the Federal Reserve Bank of New York’s Innovation Center and the Bank for International Settlements (BIS) Innovation Hub Swiss Centre, smart contracts could offer central banks flexible, rapid-response tools in a tokenized financial system.
The study, dubbed Project Pine, tested a prototype “generic customizable monetary policy tokenized toolkit” for further research by central banks, according to a BIS report published May 15.
“The smart contract toolkit was fast and flexible,” the BIS wrote. “In hypothetical scenarios, the central bank was able to add and change tools instantly.”
The report emphasized that if tokenization becomes widely adopted for money and securities, smart contracts could play a central role in how monetary policy is executed.
This marks a “first step” in highlighting the potential benefits of tokenization for central banks, according to the BIS.
The framework “speed and consistency” was “validated” within a 10-minute hypothetical scenario where central banks quickly changed collateral criteria and exchanged liquid collateral for illiquid amid falling collateral values.
The smart-contract framework also allowed central banks to deploy a new facility offering reserves and changing the interest rates on the reserves in an “immediate” implementation.
Project Pine, smart contract operations. Source: BIS
Smart contracts, tokenization may help central banks
Smart contracts and tokenization technology may help central banks’ rapid response to “extraordinary events,” the BIS report said:
“This speed, coupled with the ability to adjust any of the parameters at any time, gives central banks flexibility in responding to unforeseen events and fast-moving crises.”
While promising, the report also acknowledged that central banks will likely face infrastructure challenges, as most existing systems are not designed for these advanced use cases.
Smart contract testing scenario. Source: BIS
Project Pine employed Ethereum’s ERC-20 token standard combined with another standard for “access control.”
Financial institutions have increasingly embraced tokenization in recent years.
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“It’s an interesting moment,” was how one government source described the High Court ruling that will force an Essex hotel to be emptied of asylum seekers within weeks.
That may prove to be the understatement of the summer.
For clues as to why, just take a glance at what the Home Office’s own lawyer told the court on Tuesday.
Granting the injunction “runs the risk of acting as an impetus for further violent protests”, the barrister said – pointing out that similar legal claims by other councils would “aggravate pressures on the asylum estate”.
Right on cue and just hours after the ruling came in, Broxbourne Council – over the border in Hertfordshire – posted online that it was urgently seeking legal advice with a view to taking similar court action.
The risks here are clear.
Image: Police officers ahead of a demonstration outside The Bell Hotel. Pic: PA
Recent figures show just over 30,000 asylum seekers being housed in hotels across the country.
If they start to empty out following a string of court claims, the Home Office will struggle to find alternative options.
After all, they are only in hotels because of a lack of other types of accommodation.
There are several caveats though.
This is just an interim injunction that will be heard in full in the autumn.
So the court could swing back in favour of the hotel chain – and by extension the Home Office.
Image: Protesters in Epping on 8 August. Pic: Reuters
We have been here before
Remember, this isn’t the first legal claim of this kind.
Other councils have tried to leverage the power of the courts to shut down asylum hotels, with varying degrees of success.
In 2022, Ipswich Borough Council failed to get an extension to an interim injunction to prevent migrants being sent to a Novotel in the town.
As in Epping, lawyers argued there had been a change in use under planning rules.
Image: The hotel has been the scene of regular protests. Pic: PA
But the judge eventually decided that the legal duty the Home Office has to provide accommodation for asylum seekers was more important.
So there may not be a direct read across from this case to other councils.
Home Office officials are emphasising this injunction was won on the grounds of planning laws rather than national issues such as public order, and as such, each case will be different.
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But government sources also smell dirty tricks from Epping Council and are suggesting that the Tory-led local authority made the legal claim for political reasons.
Pointing to the presence of several prominent Tory MPs in the Essex area – as well as the threat posed by Reform in the county – the question being posed is why this legal challenge was not brought when asylum seekers first started being sent to the hotel in 2020 during the Conservatives‘ time in government.
Epping Council would no doubt reject that and say recent disorder prompted them to act.
But that won’t stop the Tories and Reform of seizing on this as evidence of a failing approach from Labour.
So there are political risks for the government, yes, but it’s the practicalities that could flow from this ruling that pose the bigger danger.
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