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Fed-BIS Report Finds Monetary Policy Still Effective in Tokenized Financial Systems

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A joint research project between the New York Federal Reserve and the Bank for International Settlements (BIS) has concluded that central banks can effectively conduct monetary policy—and potentially do so more efficiently—in a tokenized, decentralized financial environment, according to a report released on Wednesday.

The findings stem from Project Pine, a prototype initiative developed by the New York Fed’s Innovation Center and the BIS Innovation Hub, aimed at evaluating whether digital tools and blockchain-based systems could support core monetary operations in a future financial system dominated by tokenized assets.

Key Takeaways:

  • The prototype system was able to instantaneously execute monetary policy operations in response to simulated market conditions, preserving central banks’ ability to manage liquidity and interest rates.

  • The report suggests that smart contracts could allow central banks to rapidly deploy or adjust monetary policy tools, making operations more responsive in times of uncertainty.

  • Tokenization refers to digital representations of assets on blockchain platforms, increasingly used in decentralized finance (DeFi) and being explored by wholesale financial markets.

“Future operations could be nimbler in uncertain conditions and potentially reduce frictions between the time of announcements and offerings,” the report noted.

Future Implications for Central Banks:

While there is currently no immediate threat to how central banks implement policy, the report acknowledges that widespread tokenization in wholesale markets could demand participation in new financial infrastructures and interaction with digital tokens to remain effective.

It also points to the growing operational complexity of monetary policy in a hybrid financial system, where automation may need to complement—though not entirely replace—human judgment.

“If the private financial sector adopts tokenization on a broad scale… central banks may need to adapt to novel market infrastructures,” the report states.

Strategic Preparation, Not Reaction

The findings are part of preparatory research to ensure central banks remain capable of navigating an evolving financial landscape. The system tested was not tailored to any specific central bank but was designed to mimic standard monetary operations such as repo transactions, liquidity injections, and interest rate targeting.

While decentralized financial technologies may present new risks, they also offer opportunities for streamlining operations, reducing time lags, and enhancing precision in policy deployment.

Bitcoin Breaks $100,000 Barrier Again Amid U.S.-UK Trade Deal Optimism

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Bitcoin surged past the $100,000 mark on Thursday, regaining ground for the first time since February and reflecting renewed investor confidence following a breakthrough trade deal between the United States and the United Kingdom.

By midday, Bitcoin was trading at $101,329.97, up 4.7% on the day, buoyed by improved global risk sentiment. The crypto asset has now entered positive territory for 2025, although it still trails its January all-time high of over $109,000.

The rally follows the announcement of a U.S.-UK trade agreement between President Donald Trump and British Prime Minister Keir Starmer. The deal maintains a 10% U.S. tariff on UK imports but includes Britain lowering its tariffs to 1.8% and expanding access to U.S. goods — signaling a potential thaw in the protectionist climate that has defined global trade since Trump’s return to office.

Market Impact and Commentary:

  • Antoni Trenchev, co-founder of Nexo, described the resurgence as a “formidable feat” and emphasized that long-term holders drove the rebound, overpowering short-term profit-taking.

  • “Buying peak fear — just last month Bitcoin was languishing around $74,000 — has proven exceptionally lucrative,” Trenchev added.

  • Joel Kruger of LMAX Group pointed to rising institutional interest, geopolitical stability, and Chinese monetary stimulus as key tailwinds behind the rally.

Other Cryptos Lag Behind:
Ethereum’s native token Ether climbed 14% to $2,050.46, reaching a one-month high, but it remains nearly 50% below its 2024 peak. Other altcoins have yet to mirror Bitcoin’s bullish momentum.

Bitcoin’s trajectory was weighed down earlier this year by uncertainty around the pace of pro-crypto reform under Trump’s new administration. April’s widespread tariff announcements spurred a flight to safety, leading to a temporary slump in risk assets, including crypto.

Now, with geopolitical risk easing and renewed appetite from long-term investors and institutional funds — particularly through Bitcoin ETFs — market sentiment appears to have decisively shifted back in favor of crypto’s largest token.

With the $100,000 psychological level reclaimed, traders are eyeing $109,000 and beyond as the next major milestone.

China Plans Record Budget Deficit of 4% of GDP in 2025 to Counter Economic Headwinds

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China’s leaders have agreed to raise the budget deficit to 4% of GDP in 2025, the highest on record, while maintaining an economic growth target of around 5%, according to two sources familiar with the matter. This decision, aligned with a “more proactive” fiscal policy, emerged from last week’s Central Economic Work Conference (CEWC) and December’s Politburo meeting, although the targets remain unofficial.

The proposed increase in deficit, up from the 2024 target of 3%, translates to an additional 1.3 trillion yuan ($179.4 billion) in spending. A significant portion of this fiscal stimulus will be funded by issuing off-budget special bonds, the sources noted. These plans, which could still change, are typically announced officially during the annual parliament meeting in March.

The ramped-up fiscal measures aim to cushion China’s economy from challenges, including a severe property crisis, mounting local government debt, and weak consumer demand. Analysts also point to the anticipated U.S. tariff hikes under a Trump administration as a key risk, with levies expected to exceed 60% on Chinese imports.

China’s exporters, who ship over $400 billion worth of goods annually to the U.S., fear the tariffs could shrink profits, hurt job creation, and amplify economic woes. Analysts warn this could exacerbate industrial overcapacity and intensify deflationary pressures. Some manufacturers have already started relocating production abroad to sidestep trade penalties.

Fiscal Stimulus and Monetary Policy
The CEWC emphasized “steady economic growth” through increased fiscal spending and further issuance of government debt. China’s central bank is expected to adopt an “appropriately loose” monetary policy stance, replacing its 14-year-long “prudent” approach. This shift raises expectations for interest rate cuts and liquidity injections, signaling a dual focus on fiscal and monetary easing.

Morgan Stanley predicts a 2-trillion-yuan fiscal expansion, combining a modest increase in off-budget bonds and a wider deficit. Analysts suggest the 5% GDP target is more about guiding economic expectations and restoring business confidence than imposing a hard constraint.

Yuan Strategy
To mitigate the impact of U.S. tariffs, China may consider allowing the yuan to weaken in 2025, as reported last week. While this move could support exporters, China has reiterated its pledge to maintain the currency’s “basic stability at a reasonable and balanced level,” consistent with CEWC statements from previous years.

Facing external and domestic headwinds, China’s record fiscal expansion highlights its commitment to propping up growth and stabilizing the economy amid rising geopolitical uncertainties and structural challenges.