Competing Visions

Digital assets are here to stay despite the challenges and turmoil of the past year. Business failures and volatility hit some sectors, such as cryptocurrency exchanges, stablecoins, and cryptoassets as investments. Other sectors were largely unaffected and continued to move forward. These include most of the areas with the greatest long-term potential to transform finance, including the tokenization of financial assets and deposits and the development of central bank digital currencies (CBDCs). The rise of digital assets and distributed ledger technology (DLT) has the potential to upend the competitive landscape, creating new, efficient, nimble competitors, but also offering incumbents a potential new lease on life by taking advantage of those same benefits. Executives and policymakers need to stay focused on the opportunities and risks associated with digital assets.

The future of digital assets as a whole depends heavily on the future of digital money, as payments power the financial system. However, digital money could evolve in quite different ways, so executives and policymakers need to think in terms of scenarios rather than relying on a single prediction. There are different forms of payment, spanning CBDCs, tokenized deposits and different forms of stablecoins. Digital money will transform business models as its speed and automation reshapes liquidity, market-making, and risk management, which could impact the broader financial system considerably.

Senior executives cannot wait until all of these issues are settled, though; they need to start preparing now for the ways in which digital assets could transform the competitive landscape in which they operate. To help industry executives and policymakers frame their Executive Summary 2 Redefining The Future of Money | Scenarios thinking, this report presents four paradigms based on the types of institutions that may dominate with digital asset solutions at scale. These paradigms are based on the issuers of money, the technology they choose and the use cases they target. Traditional financial institutions could successfully evolve or be challenged by the rise of digital intermediaries. Alternatively, universal open networks could transform financial markets and business models, or sovereigns could expand their control of money and change the role for the private sector and resulting business models.

In a world of significantly higher interest rates, the economic value generated from payments will be bigger and even more contested. Establishing valuable commercial propositions will be crucial to scaling different forms of digital money, but their viability will depend on the policy landscape and technological innovations. We discuss competing forms of money and network design. Money today is based on a two-tier system, with most economic activity conducted using private money (deposits) while financial institutions have exclusive access to high volume public money (reserves) to settle transactions. New forms of private money are emerging with new types of issuers (stablecoins) and economic models (decentralized stablecoins). 

Digital money exists in different types of networks, from open permissionless networks that defy national borders to tightly controlled ones. Network participation is now a key strategic and policy issue, as the traditional two-tier structure could be flattened either by public money being made available more broadly, or by networks so extensive and capable that they can replace financial intermediaries with automation.

Policymakers and senior leaders in the financial industry, both incumbents and disruptors, should consider a range of plausible future scenarios, evaluate their potential impact, plan responses for the most likely developments and consider how to bring about the most desirable ones. This process may play out quite differently across retail domestic payments, cross-border payments, and asset settlement. We will follow up in coming months with papers that focus on these specific digital money use cases.

Technology has transformed the way we think about and use money for centuries, from the first electronic payments in the telegraph era to the rise of mobile payments and cryptocurrencies. Today that process is poised to accelerate dramatically. Distributed ledger technology (DLT), such as blockchain, is inspiring the creation of new forms of money, from central bank digital currencies and tokenized deposits to stablecoins. <span class="section" id="desktwo"></span> These digital monies have the potential to make payments faster, cheaper, and more secure, and enable new economic activity and business models.

This transformation of money will both fuel and be driven by a broader transformation of the financial system. DLT is enabling the creation of a broad array of assets, from digitized versions of traditional financial instruments such as stock and bonds and historically illiquid assets such as art, real estate, and intellectual property, to digitally native vehicles that offer novel ways to transfer value. For example, utility and governance tokens, which have proliferated in the crypto ecosystem, price access to digital platforms and the ability to redistribute value, respectively. Identity could itself become a digital asset and be used to automate compliance. These assets can attract participation by a wider range of entities and investors, as well 4 Redefining The Future of Money | Focus as change how they participate, fostering the rise of new financial products and business models.

Digital assets and technology also will change the shape of financial services and markets, creating new, efficient, nimble competitors while also offering incumbents an opportunity to dramatically improve the power and reach of their operations. By presenting transactional and ownership information on a single, shared ledger, DLT enables participants to transact with one another without the involvement of traditional financial intermediaries. It enables the automation and coordination of transaction processes among multiple stakeholders, which will change the cost and distribution of financial products. This could give rise to new private networks that displace existing intermediaries and allow greater automation and integration across borders and asset classes. Alternatively, it could create new opportunities for banks, exchanges, custodians, and other institutions that embrace DLT and adapt their business models.

Money is at the heart of these innovations. A thriving digital assets market requires a seamless way to trade and safeguard these assets, connected to associated services such as collateral management and yield enhancement. A digitally native solution that embeds money in the same distributed framework as the assets themselves will maximize the speed and cost-effectiveness of payments. Of course, such a solution needs to be trusted, reliable, and secure.

While digital assets have the potential to transform the way we store and exchange value, their success ultimately depends on whether they can be integrated with the existing financial system. Such an integration has the potential to enable faster and more secure transactions across the financial system. Payments could be settled instantly and securely, at any time of day, and at the same time assets are exchanged, a process known as atomic settlement. The financial system could change significantly, as digital money impacts liquidity, marketmaking and risk management given its speed and automation.

Establishing valuable commercial propositions will be key to scaling up digital money, but the viability of those propositions will depend heavily on the policy landscape and technological innovations. Capital and liquidity requirements will have a major impact on the feasibility of commercial propositions while the integration of digital money across borders can create the critical mass to power new business models. But both of those elements require a coordinated approach by national regulators, which does not yet exist. At the same time, advances in technology will drive whether platforms can handle the volume of activity needed. New platforms also face the classic chicken-and-egg problem: how to start attracting consumers and producers when the economic value to participants depends upon the attaining of high volume.

Financial executives can't afford to wait until all these issues are settled, though, as critical investments and decisions are being made now. In a world of significantly higher interest rates, the economic value generated from payments will be bigger and even more contested. Financial executives need to start preparing now for the ways in which DLT can transform the competitive landscape in which they operate. We present four paradigms to paint the corners for how this transformation may play out. The future of money will likely combine a mix of these different paradigms, and in potentially different proportions across various sectors.

The future of money isn't preordained. It can take radically different directions depending on who the issuers are, what technology designs they choose and use cases they target, how incentives are incorporated, and whether the regulatory and policy environment is favorable, among other factors.

Changes to money itself can have a profound impact on the financial system at large. To help industry executives and policymakers frame their thinking, we introduce four paradigms based on the types of institutions that may build solutions that scale.

This paradigm represents an evolution of the existing system, not a revolution, as banks and other incumbent financial institutions continue to dominate. (We will generally say “banks” for short.) It assumes that banks as a whole successfully evolve, with digital money supporting their continued centrality to the financial system.

For this paradigm to take hold, financial institutions need to demonstrate the commercial value of digital assets. Experimentation will lead to viable business models and banks become leading enablers for the new technologies, tokenizing both money and assets. Momentum could grow as solutions cascade across the system, from core activities like asset issuance and corporate treasury to areas like business-to-consumer, or B2C, payments. Policymakers will be key enablers, providing regulatory space for innovation, and potentially also pushing new networks that reinforce banks’ position. This paradigm also will become more likely if regulation slows down digital natives or puts limits on potential commercial models.

If banks can evolve successfully, they would maintain their key economic and intermediation roles, providing balance sheet to support trading and lending activities in new infrastructures. Modernization of payments and trading could drive major efficiencies for clients while also driving down liquidity needs and banking revenues. This could increase market concentration as smaller players are squeezed out by margin pressure as well as the cost of adopting new infrastructure and the fight for talent. Even as banks evolve, institutions would continue to face strong competition for client relationships, including from big tech.

This is the most radical paradigm, one that would strongly transform the financial system. It would see the rise of new open networks that enable borrowers and lenders, issuers and investors, and other market participants to deal directly without intermediaries. Transactions would be powered and governed by smart contracts and decentralized finance protocols. The trend towards capital market-based financing would be accelerated by algorithmic creation and allocation of credit over highly integrated networks. This could disrupt the business models of banks and today's digital natives.

Radical change would require high levels of support. Policy makers could become more comfortable with this paradigm if it is driven by new supranational organizations that enable cross-country collaboration. It’s also possible that trust is built over time through experimentation with new policy tools, as well as a growing ecosystem of risk and compliance solutions that build trust in new business models. Networks that are truly universal will also depend on convergence around shared standards, as well as continued advances in technology that enable both scale and trust.

This paradigm would imply greater participation and expansion of capital markets, but participation models could change dramatically as users and investors are connected through automation instead of intermediaries. This would require financial services providers (or new types of organizations) making using of automation to also expand risk management capabilities and successfully build incentive models.1 If users can control their data and wallets, new services could be enabled that blur the lines between banking and commerce, enabling financial activities to become embedded and seamless. With the growth and expansion of market-based financing, investors and firms alike will need to become.

This paradigm sits somewhere between evolution and revolution, with digital natives gaining scale, as the traditional financial industry struggles to adapt. Banking could move to the back end, with digital natives controlling customer access. 

This paradigm can take shape if digital assets gain scale with intermediaries carving out key areas for differentiation, such as a trusted digital money solution or efficient and compliant market infrastructure. To capture institutional flow, digital intermediaries will need regulatory acceptance of their business models. Profitability of digital natives would enable them to launch compelling new services across financial services, including lending, origination, and liquidity provision, while traditional finance players are unable to overcome legacy technology, culture and regulatory obstacles. Integration across services could be established through cooperation across the value chain, or itself become a way for new digital intermediaries to emerge that provide the range of services.

Powerful new companies could emerge that operate globally and squeeze other financial institutions out of client relationships, potentially starting with younger, early adopters. As a result, competition between financial services providers would start to move from control of deposit accounts to custody, as money increasingly moved into stablecoins held in digital wallets. This means banks and financial market infrastructure firms could be hit by multiple pressures, including loss of business, pressure to pivot business models, and costs to accelerate digital asset capabilities. Beyond banks, competition between digital natives could also accelerate and would likely include big tech players.

In this paradigm, central bank money would pick up a significant share of payment flows. This could be driven by changes in how central bank money is supplied, for example, by who can access it and its form, or alternatively, by changes in demand for safety. Central banks would leverage central bank digital currencies to alter the balance of public and private money. 

Broader usage of central bank money could enable either retail or wholesale payments to settle instantaneously. Diversion of payment flows from private money to public money could mean a move towards more narrow banking, which would have a significant impact on bank business models. While the role of the private sector in issuance of money might decrease, central banks may continue to partner with the private sector to distribute and maintain access to money. This could mean new opportunities and fee-based business models focused on the distribution and allocation of public money. These opportunities could be provided to banks, payment service providers or even new digital intermediaries.

With public money having a greater role in the economy, central banks may then have more tools to enact and control monetary supply, as well as more real-time data. This paradigm could potentially lead to greater financial stability as central banks gain more visibility and control over the money supply, but also the potential for unintended consequences and new risks to emerge as a result of the paradigm shift. Financial institutions would need to adjust their business models to account for the change in payment flows, particularly in terms of their balance sheets and funding models. There could be an increased role for technology companies in providing payment services and infrastructure, as central bank money is integrated into mainstream payment systems.

The seeds for these various paradigms are being planted now. Policy decisions are being made and consortia are being formed that will define what forms of money are viable. The networks where money is issued will define who is in the competition. While these seeds may seem far from sprouting, money has network effects and digital money can scale at a rapid pace. Senior executives should understand the key interests served and key challenges faced across these competing visions.

Competing forms of money embed different business models and economics for their issuers. Generally, issuers make a profit by earning an interest margin on the assets backing the money and by collecting fees on payments, transactions or bundled services. In a world of higher interest rates, the economic value generated from payments becomes more attractive. 

Central Bank Digital Currencies are a digital form of central bank liability.

Many central banks are exploring them to ensure the money they issue continues as an anchor of value in an increasingly digital world. A retail CBDC is intended as a modern version of paper currency or coins made available to all individuals, but digitally native and more similar in experience to a bank account, and with similar levels of data access by authorities. Several major economies are expected to launch retail CBDCs within the next five years, including China (which has been working on a digital yuan project since 2014), India, and the European Union. An expansive retail CBDC could divert deposits from the banking system, increase bank funding costs and reduce bank interest income. Some central banks are looking to cap the amount that an individual or firm may hold in CBDCs and ensure they seamlessly integrate with deposits, which could favor banks. On the other hand, CBDCs may create new fee-based income opportunity for payment service providers who partner in its distribution, favoring new digital intermediaries.

A wholesale CBDC is a modern version of reserves at the central banks issued on new central bank platforms to help financial institutions, not consumers, transact more efficiently with each other. These are being explored particularly for cross-border payments or to settle asset transactions. It could decrease the need for trapped liquidity, while increasing mobility of funds. A wholesale CBDC still assumes a two-tier structure to the financial system, where central bank money underpins private money creation. The paradigm it favors will depend on what types of institutions have access to wholesale CBDCs.

Tokenized deposits are a digital form of a bank deposit, issued by a regulated institution.

They are recorded on a distributed ledger and intended to settle trades of tokenized real world assets or other digital assets. Tokenized deposits could take on different forms, whether account or token-based. These are still in early experiments by financial institutions and central banks, and many issues remain to be resolved in both regulation and business models. For example, from a regulatory perspective, it’s not clear how capital and liquidity requirements may need to evolve as tokenized deposits may underpin different behaviors and usage. It’s also not clear how deposits will be made interchangeable and whether new business models will emerge to solve for that.

Issuing tokenized deposits would favor banks’ economic position, as they would continue accessing funding through their traditional role as deposit takers while participating in the digital asset sector. This could be a key driver for traditional finance to successfully evolve.

Fiat-backed stablecoins are digital assets designed to maintain a stable value against a national currency, such as the US dollar.

These instruments play a major role in crypto markets, with more than $7 trillion in transactions executed in 2022, and issuers are exploring their use for real-world payments. Stablecoins have not historically paid interest (unlike a deposit), providing issuers with significant value in a rising interest rate environment. They also generate fee income from transaction and treasury services that scale up with volume growth. Issuers have historically been digital natives and stablecoins could give rise to powerful new digital intermediaries, although financial institutions have recently begun to issue their own stablecoins.

Stablecoin growth will require coherent regulation and potentially adjustments to existing business models. Maintaining a peg against the dollar or other currency depends both on appropriate reserves to manage normal outflows as well as access to backstops in the case of systemic events. 

The importance of maintaining a peg was highlighted by recent contagion events in the wake of the SVB collapse, where issues in traditional finance spread to crypto markets. While the European Union’s new Markets in Crypto-assets (MICA) regulation mandates that issuers hold reserves to back their coins, the United States may take years to develop comparable rules, given the need for legislation from a divided Congress.

Decentralized stablecoins are private sector-issued digital assets backed by other digital assets.

These represent a small fraction of total stablecoin transactions and their regulatory path is not as clear as fiat-backed stablecoins, especially given their reliance on decentralized governance. After the Terra/Luna crisis, those making use of algorithms to maintain a peg have lost favor to designs based on overcollateralization. These stablecoins generate interest income from overcollateralized reserves, as well as fees from executing trades and collateral liquidation from margin calls.

While a small fraction of current market activity, they may represent the frontier of innovation, making use of smart contracts and new governance designs to manage their balance sheets and distribute the economic value from issuance.

These options are non-exhaustive. The ease of swapping different digital assets through smart contracts means a wider variety of tokens can function like money to exchange value in a transaction. This can blur the lines between money and assets, enabling new business models while also creating new policy challenges. For example, funds kept with money market funds need to be liquidated to be used in payments, but tokenized money market funds could be directly monetized through smart contracts.

Market infrastructure design and participation is becoming a key strategic and policy issue. In the traditional financial system, money and assets exist on separate networks, where banks have a privileged role in helping settle transactions. DLT-inspired technologies could upend this system and disintermediate banks. The more integrated and universal the network (that is, the more diverse types of assets and stakeholders coexist in the same distributed network), the higher the likelihood new business models could emerge that disrupt banks.

As there are significant network benefits with digital money and assets, and it is challenging for new networks to emerge, there will likely be path dependency on what’s developed in the market. If and when network effects do emerge in a breakout network, the economics of the underlying token structure will be significantly impacted. A variety of approaches have emerged, from open, permissionless networks that defy national borders to tightly controlled ones. Senior executives should 14 Redefining The Future of Money | The Paradigms understand the motivation, opportunities and challenges for each design. 

Closed (permissioned) networks impose limitations on who can access and manage the network. This approach aligns closely to the paradigm we painted for traditional finance successfully evolving, and in doing so make the benefits of digital assets available via regulated institutions. It also has greater policy support given the greater level of control and the ability to rely on existing approaches to manage risk and compliance. For example, it is the approach advocated by the Bank for International Settlements (BIS) in its vision of a universal global ledger. This type of network could be the least disruptive to the financial industry, but emerging business models and consortia could cause a reshuffling within the industry, as some banks are first to adapt and gain market share. However, restricting the number of participants could make it harder to solve the “chicken and egg” network problem, and enable digital assets to gain scale and develop rich ecosystems.

By contrast, in open (permissionless) networks, network participation is limited only by economic realities. This is the participation approach for most crypto networks today. Given the challenges with implementing compliance and regulation when there are no restrictions on access and usage, many in the industry are looking to build a “trust layer” to ensure transactions are only among verified participants, enabling compliance and controls. Banks who have issued digital bonds and stablecoins on public networks have followed this approach, only allowing counterparties who have been whitelisted as compliant to hold the tokens. Project Guardian by the Monetary Authority of Singapore (MAS) was an example of experimentation by the public sector. As discussed in our paper on the project, broader industry efforts are needed to scale this solution, including the creation of legal clarity, standards and guardrails. A trust layer could enable digital natives to launch innovative new services within lending, origination, and financing in a manner that gains policy support. 

The future of money is highly unlikely to be monochrome, with every sector adopting the same instruments, technology designs, and business models. Instead, it will grow use case by use case, and will likely combine tinges of some or all of the four paradigms. Here, we look at how these factors may play out among some of the most likely competitors across three major use cases – domestic retail payments, crossborder payments, and asset settlement. Our upcoming papers will explore these use cases in more depth.

Digital money could unleash a fresh wave of innovation in a sector that has been transformed by technology since the introduction of online payments in the late 1990s. Today millions of small merchants depend on the services of payment fintechs while mobile and contactless payment methods and “buy now, pay later” lending services have become ubiquitous in many countries. The global digital payments market is projected to more than double in five years, to $188 billion in 2028 from an estimated $83 billion this year. Financial infrastructure, data, and technology companies have taken market share from banks and now account for nearly a third of 16 Redefining The Future of Money | Institutional DeFi Design the world’s 50 largest financial institutions, up from just two a decade ago.

Blockchain-native innovators could grab a slice of that business with new value-added services based on programmable smart contracts or loyalty features like rewards programs. Stablecoin issuers may look to apply their technology to real-world retail payments, but they will need to demonstrate an ability to scale their businesses to handle a far greater volume of transactions than they do today. Open infrastructures that allow users to exercise more control over their data, an integral part of web3 ecosystems, also may gain favor with consumers.

Among today’s incumbents, digital payment companies could face the fewest obstacles in adapting to digital money. Credit card companies enjoy widespread brand recognition and already use tokens to securely transmit users’ information with every transaction. Technology firms will likely play an important role in adoption, as they are well placed to rapidly scale digital money solutions. Among banks, all but the largest players may struggle to modernize their payment services while maintaining legacy technology. But banks have extensive customer relationships and could leverage this and their regulated status to develop identity solutions that will underpin digital money.

Central bank digital currencies may be the big wild card in retail payments. While roughly 100 jurisdictions around the world are exploring the issuance of CBDCs or have already done so, live retail projects have had challenges with adoption and many, as is the case of the European Central Bank, are considering limiting retail use so as not to undermine the banking system. This could create a gap potentially filled by different intermediaries. Many CBDC projects call for leaving the development of new payment features to the private sector.

The ultimate winners in retail payments will be those who can provide a superior user experience, robust security features, and scalable technology while also building and maintaining trust with consumers and businesses.

Sending money from one country to another can be a costly and prolonged process. Our joint paper showed that corporates move more than $23 trillion across borders each year and incur roughly $120 billion in transaction costs Transactions often take days to settle, with low-volume currency pairs having the longest delays. This friction hits both multinational companies, which dominate the world’s annual goods and services trade of more than $55 trillion, and some of the globe’s most marginalized communities, including immigrants who send more than $620 billion a year to their families in low- and middle-income countries.

The size and institutional nature of most cross-border flows make these payments 17 Redefining The Future of Money | Institutional DeFi Design a ripe target for CBDCs. Our joint paper estimated that a common digital platform linking national CBDCs to enable real-time, 24/7 cross-border payments could slash corporate transaction costs by more than 80%, or $100 billion a year. Some countries have already started experimenting. In a pilot project with the BIS, the central banks of China, Hong Kong, Thailand, and the United Arab Emirates showed that digital ledger technology could execute trades between the four parties’ digital currencies in seconds and reduce costs as much as 50% by cutting out correspondent banks and streamlining liquidity management. So far, however, this solution lacks a critical mass as many countries are still early in exploring wholesale CBDCs or connecting distributed ledger technology to existing settlement systems. Such a system also would require broad agreement on governance as well as harmonized legal and regulatory standards.

This leaves an opening for commercial banks with tokenized deposits and stablecoin issuers, which may be able to gear up more quickly than governments. Banks would effectively be disrupting some of their own business as real-time payments would reduce customers’ need for liquidity, but that may be a necessary cost of maintaining client relationships and gaining efficiencies. Stablecoin issuers, for their part, would need to demonstrate adequate reserve backing and gain scale. The $7 trillion in stablecoin transactions in all of 2022 equals just one day’s worth of volume in the global foreign exchange market. And any bank or stablecoin issuer in this space will need to be capable of operating with a variety of different systems, public and private, and meeting capital and liquidity requirements.

The nature of the foreign exchange business also may encourage innovation by players from the open world of DeFi. The global FX market is vast, lightly regulated, and receptive to new business models. High-frequency traders, electronic communications networks, hedge funds, and other financial institutions have taken advantage of technology advances and algorithmic trading techniques to displace banks as the driving force in spot currency trading over the past 25 years. The next wave of change could see digital intermediaries using automated market making and liquidity smart-contract pools to execute low-cost, real-time payments.

The cross-border opportunity is vast but the challenge facing all innovators is the need for coordination, harmonization, and interoperability between so many jurisdictions and technology platforms. This market may remain fragmented for some time among a variety of digital money solutions, delaying the payback on market participants’ investments.

Traditional asset settlement, while largely electronic, is still costly, time-consuming, and complicated. Processes are fragmented by asset classes and jurisdictions, with limited standardization. Digital money could introduce some greater efficiencies, but it would require the widespread tokenization 18 Redefining The Future of Money | Institutional DeFi Design of a range of assets to reap the full benefits of settling trades in CBDCs or stablecoins or tokenized deposits. We are far from that point, with total digital bond issuance amounting to just $1.5 billion currently, a tiny fraction of the $127 trillion global fixedincome market. 

Instead of regarding this as a stumbling block, industry participants should consider it as an opportunity to design DLT-based money and settlement processes into tokenized asset markets from the very start. Digital payment solutions could enable a variety of technology firms to compete with global custodians that have traditionally dominated this space. DeFi protocols can automate financial transactions and provide a more decentralized and secure way of settling assets and automating riskmanagement practices. Real-time settlement based on delivery versus payment can reduce risk of counterparty default and free up capital for other purposes.

Banks, custodians, and other traditional intermediaries will need to adapt quickly to harness these changes. While some estimates suggest tokenized assets could grow into a $XXXX market by 2030, the reinforcing benefits of redesigning asset forms and the money that’s used to settle transactions could act as a flywheel, accelerating the rate of change.