ECB Director: tokenization gains unmatched by previous waves of tech change

Yesterday Piero Cipollone, a member of the European Central Bank’s (ECB’s) executive board, gave an expansive speech on tokenization describing it as having “the potential to deliver efficiency gains unmatched by previous waves of technological change.” But he also highlighted the dangers of fragmentation and paths to address this.

Despite many waves of previous financial innovation, the unit cost of financial intermediation in the US has stubbornly remained around 2%, which is not significantly different from major European economies. Cipollone framed the goal as reducing the gap between savers and borrowers. This lack of cost reduction may be the result of those innovations, including electronic trading and dematerialization, layering efficiency gains onto an existing financial architecture.

This contrasts with tokenization. “Rather than improving just one part of a system, these technologies reframe the logic of the system as a whole,” said Cipollone. That’s because distributed ledger technology (DLT) can support the full life cycle of issuance, trading, settlement and custody on the same infrastructure and operating 24/7.

However, he also highlighted that the gains are “conditional on the complementary components of a market adopting this technology simultaneously.” He provided an analogy with electricity, where factories initially simply replaced steam engines with dynamos. It wasn’t until factories redesigned their entire workflows that the full benefits were reaped. Earlier this week another central banker, Tuang Lee Lim, Assistant MD at the Monetary Authority of Singapore (MAS), made a similar analogy between tokenization and the invention of cars. “Who wants to buy a car without roads?” asked Lim. “The roads, the whole infrastructure needs to be in place.”

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