Remarks by Vice Chairman Travis Hill at the Mercatus Center on “Banking’s Next Chapter? Remarks on Tokenization and Other Issues”
Thank you to the Mercatus Center for having me today. I am going to devote most of my remarks to a discussion of tokenization and the future of our financial system, and then will conclude by briefly discussing a few discrete issues related to bank failures.
Tokenization
Money and payments have been evolving for as long as they have existed. From general commodities to precious metals to cash to credit cards, the methods that society has used to store and transfer value have changed dramatically over time, and each major upgrade to the monetary architecture has introduced both new benefits and new risks. Similarly, our payment, clearing, and settlement infrastructure – the plumbing at the heart of the financial system – has evolved considerably over the past several decades.
As most of us are reminded daily, electronic and digital forms of money and payments now predominate. Credit card, ACH, and other noncash payments have increased rapidly in recent years, and the share of households that utilize mobile banking as the primary method to access their accounts continues to rise. Furthermore, the vast majority of what people generally think of as “money” is in reality ledger balances sitting on databases maintained by commercial banks.
Against this backdrop, I am going to focus on one specific innovation that has been the subject of a tremendous amount of research and development in recent years: tokenizing commercial bank deposits and other assets and liabilities. At its most basic level, tokenization transforms the way ownership of assets is recorded and enables far-reaching new functions, as described further below. Although tokenized assets, including tokenized deposits, may reside on blockchains and other distributed ledgers, they should not be confused with blockchain-native bearer assets like Bitcoin and Ether (generally referred to as crypto-assets or cryptocurrencies). Instead, tokenization involves a representation of “real-world assets” on a distributed ledger, including, but not limited to, commercial bank deposits, government and corporate bonds, money market fund shares, gold and other commodities, and real estate.
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