BIS Annual Economic Report 2025 — Digital Money and the Future of the Financial System

The BIS Vision: Why Digital Money Matters Now

The Bank for International Settlements (BIS) has released one of the most consequential chapters of its 2025 Annual Economic Report — a sweeping blueprint for how digital money should evolve to serve the global economy. Titled “The Next-Generation Monetary and Financial System,” Chapter III does not merely survey the landscape of digital finance; it delivers a clear verdict on what works, what fails, and what central banks must do to ensure the monetary system remains sound in an era of rapid technological transformation.

The timing is critical. Stablecoin market capitalisation has surged past $200 billion. Tokenised government bonds now exceed $4 billion across nine currencies. Central bank digital currency (CBDC) pilots have multiplied worldwide. Yet the BIS argues that without deliberate architectural choices, these innovations risk fragmenting the very trust infrastructure that underpins modern finance. The report frames the stakes bluntly: society can either build a next-generation system on “tried and tested foundations of trust” or “re-learn the historical lessons about the limitations of unsound money, with real societal costs.”

For financial institutions, policymakers, and technology firms alike, this report is essential reading. It establishes the intellectual framework that will likely guide monetary policy decisions and financial stability frameworks for the next decade. Below, we break down the report’s nine core themes — from the fundamental economics of money to the BIS Innovation Hub projects already building the future.

Money, Trust, and the Two-Tier System

Before addressing any technology, the BIS grounds its analysis in first principles. Money, the report reminds us, is fundamentally a social convention — a shared belief system that transforms otherwise worthless tokens into universally accepted media of exchange. The key property is that money is “information-insensitive”: agents use it with “no questions asked,” without conducting due diligence on the issuer before accepting payment.

The modern monetary system achieves this through a two-tier architecture. At the base layer, central bank reserves serve as the ultimate settlement asset — the one form of money that carries zero credit risk because it is backed by the sovereign. On top of this, commercial banks create money through lending, with deposits representing claims on the banking system that are redeemable at par for central bank money.

This architecture is not accidental. It evolved over centuries to solve a fundamental problem: how to combine the safety of sovereign-backed money with the innovation and accessibility of private sector financial services. The BIS is emphatic that technology should enhance this structure, not replace it. As the report notes, “new technologies do not change the economics of these arrangements, but they bring important opportunities to strengthen the features of money.”

One of the report’s most illuminating passages debunks a common misconception about how payments work. “Sending a payment” evokes images of money flowing from one place to another. In reality, no physical object changes hands and no money “flows.” Instead, a series of coordinated ledger updates occur across intermediaries and the central bank, with settlement in central bank reserves ensuring finality. Understanding this mechanism is crucial for evaluating both the promises and limitations of digital money alternatives.

The Triple Test: Singleness, Elasticity, and Integrity

The intellectual centrepiece of the BIS report is a rigorous framework for evaluating any monetary arrangement — past, present, or future. The framework consists of three tests that any form of money must pass to be considered sound:

Singleness requires that money issued by different entities is accepted at par — one dollar from Bank A equals one dollar from Bank B, no questions asked. This property is so fundamental that most people take it for granted, yet achieving it requires an elaborate infrastructure of deposit insurance, central bank lender-of-last-resort facilities, and real-time gross settlement systems.

Elasticity means the monetary system can flexibly expand and contract the supply of money to meet economic needs. In a modern economy, the sheer volume of daily payment values — trillions of dollars — makes it impractical to require full pre-funding of every transaction. Banks provide elasticity through overdraft facilities, credit lines, and balance sheet expansion, with central bank liquidity backstops ensuring the system does not seize up under stress.

Integrity demands that the monetary system resists fraud, money laundering, terrorism financing, sanctions evasion, and other forms of financial crime. As the BIS emphasises, integrity is not optional — it is “a precondition for trust,” and without it the entire monetary system’s legitimacy erodes. Modern integrity frameworks rely on know-your-customer (KYC) rules, anti-money laundering (AML) systems, and the ability to freeze or reverse illicit transactions.

The BIS applies these three tests systematically across the report, using them as a consistent lens to evaluate stablecoins, tokenised deposits, CBDCs, and new financial infrastructures. The framework is deliberately technology-neutral — it asks not whether a technology is novel, but whether it preserves the properties that make money work.

Stablecoins Under Scrutiny: A $200 Billion Question

The report’s most pointed analysis targets stablecoins — digital tokens designed to maintain a stable value relative to a reference currency, predominantly the US dollar. With over 99% of stablecoins dollar-denominated and cross-border flows reaching approximately $400 billion by 2024, the BIS acknowledges that stablecoins have found genuine demand. Key drivers include access to dollar-denominated assets in emerging markets, lower-cost cross-border transfers, and on/off-ramps to the broader cryptocurrency ecosystem.

However, the BIS concludes that stablecoins fail all three tests of sound money:

• Singleness failure: Different stablecoins trade at varying exchange rates depending on issuer creditworthiness. The report illustrates this with a vivid scenario: a shopkeeper checking her phone sees she has received “10 red dollars” alongside her existing “10 blue dollars” and “10 white dollars” — each worth slightly different amounts. Various stablecoins have experienced substantial deviations from their pegs, and even fiat-backed stablecoins exhibit higher annualised volatility than the S&P 500.
• Elasticity failure: Stablecoin issuers operate under a “cash-in-advance constraint” — they must hold reserves equal to the tokens outstanding, backed by high-quality liquid assets. Unlike banks, they cannot expand their balance sheets to provide credit or absorb payment shocks. During the 2025 tariff uncertainty, unused bank loan commitments proved a “crucial lifeline” for firms — a function stablecoins structurally cannot perform.
• Integrity failure: The BIS characterises stablecoins as “digital bearer instruments” circulating on public, pseudonymous blockchains. This bearer nature — similar to physical cash but operating at digital speed and global scale — makes stablecoins “the go-to choice for illicit use to bypass integrity safeguards.” Enforcing KYC, AML, and sanctions compliance on bearer instruments circulating across permissionless networks remains an unsolved challenge.

The comparison to the 19th-century Free Banking Era is deliberate: before centralised monetary authorities, private banknotes circulated at varying discounts depending on issuer reputation and distance from the issuing bank. The BIS argues stablecoins are recreating these same inefficiencies in digital form.

The macroeconomic implications are equally concerning. Stablecoin issuers have become among the top buyers of US Treasury bills, with purchases on par with those of major sovereign holders like Japan and China. A $3.5 billion increase in stablecoin market capitalisation can depress Treasury bill yields by 2.5 to 5 basis points, with effects up to three times larger during redemption episodes. This growing footprint in safe asset markets introduces a new vector of financial stability risk that regulators are only beginning to understand.

Tokenisation: The Next Evolutionary Leap

While the BIS is sceptical of stablecoins, it is emphatically optimistic about tokenisation — the process of recording claims on real or financial assets from traditional ledgers onto programmable platforms. The report describes tokenisation as the most significant advancement in monetary infrastructure since the transition from paper to digital systems, because it fundamentally changes what money and financial assets can do.

The key innovation is programmability. Traditional digital ledgers simply record balances. Tokenised platforms integrate the records of underlying assets with the rules and logic governing their transfer. This enables three transformative capabilities:

• Contingent performance: Operations are triggered automatically when predefined conditions are met — for example, a payment executes only when goods are confirmed delivered.
• Atomic settlement: Multiple asset transfers occur simultaneously and indivisibly — either all legs of a transaction complete, or none do, eliminating settlement risk.
• Composability: Multiple transactions can be bundled into integrated automated sequences, much like smartphone app ecosystems build upon shared platform capabilities.

The BIS draws an analogy to the evolution of smartphones: “Much like the unforeseen growth of smartphone app ecosystems, the financial system’s evolution will be limited only by the creativity of developers building on this foundation.” The implication is that tokenisation does not merely digitise existing processes — it creates entirely new possibilities for financial engineering that current systems cannot support.

Critically, tokenisation does not require public, permissionless blockchains. The BIS envisions tokenised platforms using permissioned distributed ledger technology (or even non-DLT approaches) with appropriate data access controls, governance frameworks, and regulatory oversight. The technology is the enabler, not the end goal — what matters is the functional improvement in how financial assets are created, transferred, and settled.

The Tokenised Trilogy: Reserves, Deposits, and Bonds

The report’s architectural centrepiece is the concept of a unified ledger — a new type of financial market infrastructure that brings together three tokenised assets: central bank reserves, commercial bank deposits, and government securities. Together, these form what the BIS calls the “tokenised trilogy.”

Tokenised central bank reserves serve as the settlement foundation, ensuring singleness by providing the risk-free asset against which all other claims settle. When a payment moves from one bank to another, the underlying settlement in tokenised reserves happens atomically — instantly and irrevocably — rather than through the sequential, multi-step processes that characterise current systems.

Tokenised commercial bank deposits preserve the two-tier monetary system while adding programmability. When a customer pays a merchant using tokenised deposits, the payer’s bank debits the customer’s account and the payee’s bank credits the merchant’s — exactly as today, but with atomic settlement in central bank reserves occurring simultaneously. No new credit exposures are created between banks, and the familiar infrastructure of deposit insurance and prudential regulation continues to apply.

Tokenised government securities complete the trilogy by bringing the most critical class of financial assets onto the programmable platform. More than 20 tokenised sovereign, supranational, and agency bonds have already been issued, totalling over $4 billion across nine currencies. Early evidence is encouraging: tokenised bonds show tighter bid-ask spreads (17 basis points versus 30 for conventional bonds) while maintaining comparable issuance costs. With nearly $80 trillion in outstanding government bonds globally, even modest efficiency gains could yield significant systemic benefits.

The unified ledger also transforms securities settlement and repo markets. Outstanding repos and reverse repos total nearly €11 trillion in Europe and $6.5 trillion in the United States. Tokenisation enables intraday repo transactions — a capability largely absent in conventional markets — where banks can borrow against tokenised government bonds for hours rather than overnight, with smart contracts automating collateral verification, margin calls, and settlement.

Reinventing Cross-Border Payments

Cross-border payments remain one of the most persistent pain points in global finance. The current correspondent banking model involves sequential, multi-step account updates across multiple intermediaries and messaging systems — each operating on different ledgers, in different time zones, under different regulatory regimes. The result is delays measured in days, settlement risk, high costs, and opacity that frustrates both businesses and consumers.

The BIS proposes a radical simplification through next-generation correspondent banking on a unified ledger. The key innovations are threefold:

1. Merged messaging and settlement: Payment instructions and account updates are combined into single atomic transactions, eliminating the gap between communication and execution that plagues current systems.
2. Atomic settlement across currencies: Foreign exchange transactions settle instantaneously with delivery-versus-payment, removing the Herstatt risk (where one leg of a currency trade settles but the other does not) that has haunted international finance since the 1970s.
3. Compliance by design: AML/CFT checks and sanctions screening are embedded into the platform itself, rather than being layered on as separate processes at each intermediary. The report introduces the concept of “integrity by design” — architectural choices that make compliance an inherent feature rather than an afterthought.

The flagship initiative in this space is Project Agorá, developed by the BIS Innovation Hub in collaboration with seven central banks (including the Eurosystem, Bank of Japan, Bank of Korea, Bank of Mexico, Swiss National Bank, Bank of England, and Federal Reserve) and 43 private financial institutions across seven jurisdictions. This is not a theoretical exercise — it is a working prototype of the next-generation system the BIS envisions.

Complementing Agorá, Project Mandala tackles the compliance dimension by encoding jurisdiction-specific regulatory policies into the platform, enabling automated, real-time compliance checks for cross-border transactions without requiring human intervention at each checkpoint.

Monetary Policy in the Age of Smart Contracts

One of the report’s most forward-looking sections examines how tokenisation could transform central banking itself. Project Pine, a collaboration between the BIS Innovation Hub and the Federal Reserve Bank of New York, demonstrates that central banks can use smart contracts to implement monetary policy operations on tokenised platforms.

The prototype shows that smart contracts can automate the full lifecycle of monetary policy tools — from creating new lending facilities and setting interest rates to verifying collateral eligibility, applying haircuts, calculating interest accrual, and managing settlement. Operations that currently require extensive back-office processing could execute in real time, with 24/7 availability.

The implications are significant for crisis response. During financial stress, central banks need to deploy new facilities rapidly. Project Pine demonstrates that tokenised infrastructure allows central banks to “instantly create and adjust monetary policy tools” — deploying emergency lending facilities, modifying collateral requirements, and adjusting interest rates through smart contract updates rather than through the cumbersome manual processes that characterise current operations.

The report also highlights the potential for improved market intelligence. Tokenised platforms provide real-time visibility into market participants’ financial positions, enabling central banks to monitor conditions continuously rather than relying on periodic reporting. Combined with artificial intelligence and machine learning, this data could enhance both the speed and precision of monetary policy decisions.

The AI dimension extends beyond monetary policy into compliance. Box B of the report details how machine learning can transform AML/CFT operations — reducing false positives in transaction monitoring, identifying complex patterns of illicit activity across networks, and deploying AI agents as “co-pilots” for compliance officers. Project Aurora explores federated learning for cross-border AML collaboration, allowing institutions in different jurisdictions to train shared models without sharing underlying data, thereby preserving data sovereignty while improving detection capabilities.

Central Banks Must Lead: A Four-Pronged Strategy

The BIS concludes with an urgent call to action. Central banks cannot afford to be passive observers of financial innovation — they must actively lead the transformation. The report outlines a four-pronged strategy:

1. Articulate a vision: Central banks must define which features of the current financial system are essential and must be preserved in any tokenised ecosystem — particularly singleness, elasticity, and integrity.
2. Provide regulatory frameworks: Apply the principle of “same activities, same risk, same regulatory outcomes” to ensure technology-neutral regulation. For stablecoins specifically, the BIS recommends mandatory KYC compliance, reserve requirements with regular audits, authorisation from supervisory authorities, and consideration of prohibiting interest payments to align with e-money regulation.
3. Supply foundational assets and platforms: Tokenised central bank reserves are the indispensable ingredient — without them, the unified ledger lacks its settlement anchor. Central banks should also consider providing or facilitating shared infrastructure.
4. Foster public-private partnerships: The financial system’s evolution requires collaboration between central banks, commercial banks, technology firms, and regulators. Projects like Agorá demonstrate that this collaboration is already underway.

The regulatory dimension is particularly urgent for stablecoins. By 2023, more than 60% of surveyed jurisdictions had or were developing stablecoin regulatory frameworks. The EU’s MiCA regulation, Japan’s Payment Services Act amendments, and Singapore’s Stablecoin Issuance Framework represent early efforts, but the BIS warns that global coordination is essential to prevent a race to the “weakest regulatory links.”

One innovative regulatory proposal stands out: a default-block system for stablecoin addresses, where all addresses are blocked unless KYC compliance is verified. This inverts the current approach (where addresses are permitted unless flagged) and could address the integrity challenges that the bearer nature of stablecoins creates.

“Society has a choice. The monetary system can transform into a next-generation system built on tried and tested foundations of trust and technologically superior, programmable infrastructures. Or society can re-learn the historical lessons about the limitations of unsound money, with real societal costs, by taking a detour involving private digital currencies that fail the triple test of singleness, elasticity and integrity.”

This is not a neutral observation — it is a warning. The BIS is making an explicit case that the path of least resistance (allowing stablecoins to proliferate unchecked) leads to fragmentation, instability, and the erosion of monetary sovereignty. The alternative — a deliberately designed, central-bank-anchored tokenised system — requires significant investment and coordination but promises a financial system that is faster, cheaper, more inclusive, and more secure than anything that exists today. For those working in financial services, technology, and regulation, the BIS has laid down the intellectual gauntlet. The question is no longer whether the financial system will be tokenised, but by whom and on what terms.