The Central Bank of Ireland published, "DLT & Tokenisation in Financial Services" recently, which states, "Distributed Ledger Technology (DLT) has the potential to have profound implications for the financial system. The integration of DLT into mainstream finance presents clear potential benefits for providers and users of financial services, but also challenges that need to be managed. Understanding how tokenisation interacts with existing financial infrastructures, legal frameworks, forms of money and settlement, and market practices is therefore critical to ensuring that innovation supports and effects positive change, while maintaining monetary and financial stability, consumer protection and market integrity. The Central Bank of Ireland is issuing this Discussion Paper (DP) to stimulate informed dialogue on the future role of DLT and tokenisation applications within the Irish and European financial services ecosystem."
It explains, "We believe DLT and tokenisation -- if enabled and deployed correctly -- can change the financial system for the better, including by helping the EU deliver on its objectives to integrate and deepen its financial markets. Our aim here is to engage stakeholders -- including market participants, technologists, academics, innovators, investors, consumers, peers and policymakers -- to examine the implications of DLT for financial market functioning. We also want to use this DP to help inform our view on how the potential benefits of this technology can be realised, and the risks managed. Given the borderless nature of the technology, we also are closely engaged with the European Central Bank (ECB), the European Commission (EC), the European Supervisory Authorities (ESAs), International Organisation of Securities Commissions (IOSCO) and the Bank for International Settlements (BIS)."
Discussing Money Market Funds, the paper says, "Money market funds (MMFs) are closely linked to short-term funding markets and rely on highly standardised instruments and settlement processes. Tokenised MMFs (TMMFs) are beginning to warrant attention given their rapid growth and potential. As at the end of 2023, TMMFs had roughly $770 million in assets. By end December 2025, that figure had climbed to almost $10 billion. In a future state, MMF units representing ownership of fund share tokens may be natively issued on-chain without a parallel traditional infrastructure acting as the actual ledger of record. There is also a potential that tokenisation changes some of the underlying uses of MMFs. For example, there is ongoing exploration by market participants as to whether TMMF units could be accepted as eligible collateral by CCPs or bilateral counterparties, subject to conservative haircuts and concentration limits."
It continues, "Tokenising MMFs for use as collateral could materially improve the efficiency and responsiveness of collateral management, while also introducing new risk transmission channels. This should be supported by robust governance, legal clarity and supervisory oversight, essential to ensure that any efficiency gains do not undermine liquidity resilience or financial stability. Tokenisation could also lead to closer inter-linkages and associated fragility with the crypto-asset markets. Early signs of these are being observed, with tokenised MMFs increasingly being used as stablecoin reserve assets or collateral for crypto related transactions. Throughout this section, we outline illustrative use cases to support reflection on the potential benefits of different types of fund tokenisation, as well as the risks that will need to managed effectively."
Discussing "Potential Use Cases for MMFs," they write, "Use Case 1: MMF units are issued or represented in tokenised form on a permissioned DLT platform and are eligible for use as collateral in secured transactions, such as margining arrangements, securities financing transactions, or intraday liquidity facilities, subject to applicable eligibility criteria. Tokenisation could enable MMF units -- already widely used as cash management and liquidity instruments -- to be mobilised as collateral with greater operational speed, precision and transparency, while remaining subject to the requirements of Regulation (EU) 2017/1131 (MMF Regulation)."
On "Operational Arrangements," the CBI comments, "MMF units would be issued as tokens on a permissioned ledger operated by regulated entities, including the fund administrator and transfer agent. The ledger serves as the primary record of investor ownership, with token transfers subject to embedded eligibility and compliance rules. Investors would access the fund through regulated distributors, and the depositary retains oversight of asset custody and cash flows. Tokenised MMF units would be held in digital wallets operated by regulated entities (e.g. credit institutions, investment firms or financial market infrastructures)."
Among the "Benefits," they include: "Improved collateral mobility and efficiency, allowing MMF units to be mobilised rapidly and precisely; Reduced operational risk through automation of margining and collateral management processes; Enhanced transparency and auditability of collateral positions for counterparties and authorities; and, Potential reduction in liquidity buffers required for operational reasons, subject to risk controls."
Regarding "Key Risks and Supervisory Considerations," the paper states, "Liquidity and procyclicality risks: Increased use of MMFs as collateral could amplify liquidity stress at a systemic level during periods of market tension, particularly if rapid margin calls or collateral substitution occur. Valuation and data dependency risks: Reliance on oracles for NAV and liquidity data introduces new operational and governance dependencies. Legal certainty and enforceability: Clear recognition of security interests over tokenised MMF units across jurisdictions. Operational resilience: Robust governance of the DLT infrastructure supporting collateral management, including stress scenarios. Interconnectedness: Potential for tighter linkages between short term funding markets, collateral markets and DLT infrastructures."
It adds, "MMF Regulation: Continued compliance with liquidity thresholds, valuation rules and portfolio constraints; assessment of implications for MMF liquidity management tools. MiFID II/SFTR: Applicability to collateralised transactions and reporting obligations. DORA: Relevance for ICT risk management and oversight of critical third-party service providers, including oracle operators. DLT Pilot Regime: Possible relevance where collateral mobilisation occurs via DLT-based market infrastructures."
The CBI cites, "Use Case 2: Natively Issued Tokenised MMFs with Automated Subscription and Redemption - enhanced automation with potential implications for liquidity management. MMF units are issued natively on a permissioned DLT platform, with subscriptions and redemptions processed through smart contracts. The MMF remains within a controlled and regulated environment, but key operational processes are increasingly automated. This model is particularly relevant for MMFs used as treasury management or cash-equivalent instruments by institutional investors."
Finally, more "Key Risks and Supervisory Considerations," include: "Liquidity management risk: Accelerated redemption capabilities could amplify first-mover advantage dynamics. Run risk and procyclicality: Automation may increase the speed of investor reactions in stressed conditions. Governance of smart contracts, particularly regarding suspension of redemptions or activation of liquidity management tools. Consistency with MMF Regulation safeguards, including fees, gates and liquidity buffers."
In related news, a release titled, "FCA and Bank of England set out shared vision for tokenisation in UK wholesale markets," states, "UK financial firms can adopt tokenisation and distributed ledger technology (DLT) with greater confidence, as the Financial Conduct Authority (FCA) and the Bank of England set out a shared vision and seek industry views on the future of UK wholesale markets. Tokenisation is the process of creating a digital representation of a real-world asset -- such as a share, bond or unit of currency -- on a digital ledger. It has the potential to streamline wholesale markets, making everything from issuing securities to managing assets faster and more efficient. Along with greater functionality this could support market efficiency and resilience while lowering costs."
Simon Walls, executive director of markets at the FCA, comments, "Tokenisation has the potential to transform wholesale markets -- reshaping how assets are issued, traded and settled. We want to support firms in adopting this technology to lower costs, reduce risk and unlock new services, and our partnership with the Bank of England will ensure a common approach across all parts of wholesale markets. Today we are setting out the principles of a shared long-term vision to give industry the clarity it needs to engage, invest and innovate with confidence. UK markets have always embraced new technology, and that will be central to ensuring the UK remains at the forefront of global wholesale markets."
