Crypto assets have been more of a disappointment than a revolution for many users, and global bodies like the IMF and the Financial Stability Board urge tighter regulation.

Some of the rapidly evolving technology behind crypto, however, may ultimately hold greater promise. The private sector keeps innovating and customizing financial services.

But the public sector too should leverage technology to upgrade its payment infrastructure and ensure interoperability, safety, and efficiency in digital finance, as we noted in a recent working paper: A Multi-Currency Exchange and Contracting Platform. Others too are advancing similar views.

Technology has jumped ahead

New payment technologies include tokenization, encryption, and programmability:

Tokenization means representing property rights to an asset, such as money, on an electronic ledger—a database held by all market participants, optimized to be widely accessible, synchronized, easily updatable, and tamper-proof. The anonymity of token balances and transactions is not required (and in fact undermines financial integrity).

Encryption helps decouple compliance checks from transactions so that only authorized parties access sensitive information. This facilitates transparency while promoting trust.

Programmability allows financial contracts to be more easily written and automatically executed, such as with smart contracts, without relying on a trusted third party.
Private-sector innovation

With these new tools in hand, the private sector is innovating in ways that may be more transformative than the initial wave of crypto assets: tokenization of financial assets, tokenization of money, and automation.

The tokenization of stocks, bonds, and other assets may cut trading costs, integrate markets, and enlarge access. But paying for such assets will require money on a compatible ledger. One example is stablecoins, which are one example of the extent they comply with regulations. More importantly, banks are testing tokenized checking accounts. And automation is widespread, allowing third parties to program functionality much as developers build smartphone apps.