Digital bonds as collateral in central bank lending

The development of the digital bond market raises important questions for central banks tasked with monetary policy and financial stability. While central banks have been actively engaging with digital currencies, less attention has been given to the role of digital bonds as potential collateral in monetary policy operations. This paper focuses on the implications of central banks accepting bonds that are issued and settled digitally as collateral. Specifically, the paper examines whether and how digital bonds that replicate the economic characteristics of conventional bonds can be integrated into the collateral frameworks of central banks when lending in liquidity-supplying operations. The main finding is that while the core principles of collateral policy remain valid for digital bonds (i.e. liquidity, reliable pricing, operational and legal robustness and being deliverable through trusted infrastructure), central banks will need to update their collateral eligibility frameworks and operations to realise the benefits and mitigate the risks of digital bonds. In the future it is likely that the spectrum of digital assets will continue to evolve. Central banks will need to be proactive to ensure that their collateral frameworks and operations remain robust and adaptable so they can continue to perform their required policy functions.