June 12
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Inside the Efforts to Tokenize Money

By: Vanessa Kargenian | June 20, 2023

Up to $5 trillion could move to tokenized money formats like CBDCs, stablecoins, and deposit tokens by 2030. At this scale, at stake is not just the type of money used to buy goods, but the structure and operations of the financial system itself.


Thursday, April 27, 2023

9:00 a.m. – 10:00 a.m. ET



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Inside the Efforts to Tokenize Money

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    By: Vanessa Kargenian | June 20, 2023
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In April 2021, FCAT first investigated the concept of “streaming money” – money that is instantly exchanged, facilitates micropayments, and is available 24/7. Two paths will likely set the foundation for this next era of money movement: 1) modernizing legacy payment systems and 2) tokenizing money using blockchain-based infrastructures. Over the last two years, we’ve seen traction along both paths. But, it’s been path 2 and the potential of distributed ledger technology (DLT) to facilitate atomic settlement and programmable money that has captured financial service firms’ imaginations. Intrinsically, the design and use of tokenized money – including central bank digital currencies (CBDCs), stablecoins, and deposit tokens – will likely have long lasting impacts, influencing both Web3 maturation and the operation of our financial system in the coming years.

Central banks’ interest in CBDCs remains strong but the public seems unconvinced of their need. To date, four retail CBDCs (Bahamas, Nigeria, Jamaica, Eastern Caribbean) have fully launched, while an additional 60 countries (including 18 of the G20) are in advanced stages of CBDC development.1 Among global central bankers, it seems no longer a question of if CBDCs will be issued but rather when, what type (retail, wholesale, or both), and with what associated design features (i.e., programmability, offline payment capabilities, DLT based). Yet, surveillance fears and confusion over CBDCs’ actual function are growing among the public, stoking political debates over their benefits and need.

Retail CBDCs – Facing sluggish adoption and technical difficulties, the retail CBDCs live today have yet to convince citizens they’re safer or better than existing digital payment offerings. The Eastern Caribbean’s DCash, for example, was offline for several weeks in early 2022 due to problems related to an expired HyperLedger Fabric certificate. In Nigeria, less than 0.5% of citizens use the e-Naria more than one year after its launch in Oct. 2021.2 Even China’s e-CNY, which is in pilot but reaches 260 million people, has disappointed officials as it only accounts for ~1% ($14.5 billion) of all digital transactions.3 Yet, 20 countries including India, Japan, and Australia are taking significant steps to pilot a retail CBDC in 2023.4 U.K. and ECB officials say it’s likely a digital pound and digital euro will be needed within the next decade to complement cash and ensure citizens have access to a digital public money option. And China is forging ahead, adding smart contract functionality to e-CNY and opening new avenues for its use, like buying securities via the Soochow Securities mobile app.5 In the U.S., a digital dollar is still far off. The Boston Fed and MIT recently concluded Project Hamilton, which explored the technical feasibility of a digital dollar. The final findings have yet to be released, but it proved that CBDCs offer functionality not possible with cash or bank accounts, such as cryptographic proofs of payment.6 Meanwhile, a Treasury-led interagency CBDC working group will soon convene to weigh the implications of CBDC issuance – retail, wholesale, or both.7

Wholesale CBDCs Unlike retail CBDCs, wholesale CBDCs (w-CBDCs) aim to enable faster interbank transfers (i.e., securities settlement, cross-border payments) such that future financial infrastructures can be more interoperable, open, and resilient. Twenty-seven countries are in advanced stages of w-CBDC development, some coordinating with the Bank of International Settlement (BIS) and SWIFT on cross-border projects.8 Consider, Project mBridge, a w-CBDC DLT pilot between the BIS, Hong Kong, Thailand, China, the UAE, and 20 commercial banks that allows firms to transact with international counterparts directly, one-on-one in their own currencies, without having to deal with correspondent banks or foreign exchange (FX) markets.9 Last fall, it facilitated over $22 million in FX transactions, marking the first time actual (not hypothetical) money was settled via a DLT platform.10 Conversely, Singapore, France, and Switzerland have partnered on Project Mariana to explore how DeFi automated market makers and hypothetical w-CBDC Singapore dollars, euros, and Swiss francs can be used to automate FX markets and settlement and enable 24/7 transactions.11 In the U.S., the NY Fed has partnered with Singapore’s Ubin+ project to explore how using w-CBDCs as a settlement asset can reduce settlement risk between two different DLT-based payment systems.12

Stablecoins’ recent instability has opened the door for deposit tokens. Last year, the Terra/Luna collapse raised concerns about stablecoins’ reserves and the financial stability risk they could pose to traditional finance.13 USDC’s de-peg from the dollar following Silicon Valley Bank’s failure and BUSD’s $500 million in outflows after news broke that the CFTC filed a lawsuit against Binance and its CEO demonstrates that interlinkage risk runs both ways. Fiat-backed stablecoins like these remain an important source of liquidity and collateral for DeFi and crypto trading with $130 billion in supply.14 However, their recent instability provides an opening for an alternative. Enter deposit tokens (or tokenized deposits), which are being pitched as a safer private money alternative. Unlike stablecoins, deposit tokens are issued by a regulated depository institution, protected by FDIC insurance, and fractionally backed by reserves (see Figure 1). But they’re still largely experimental. Singapore’s Project Guardian verified the concept last fall, tokenizing Singapore dollar deposits for trade on two public blockchains via DeFi protocols. Since then, Federal Reserve economists, J.P. Morgan Chase, the Swiss Bankers Association, and the USDF consortium have all voiced preference for deposit tokens, sparking a debate over what form of private tokenized money is safer and who (banks or non-banks) should be permitted to issue it.15 But, don’t think this means interest in stablecoins has waned. Three major Japanese banks are testing private fiat-backed stablecoin issuance on Japan Open Chain, an EVM compatible and regulatory compliant public chain.16 Brazilian investment bank, BTG Pactual, recently launched a U.S. dollar-backed stablecoin so investors can ‘dollarize’ part of their portfolio.17 And, the U.N. is working with Stellar’s non-profit arm to distribute aid to Ukrainian war refugees in USDC.18

Figure 1 – Comparison of CBDCs, Public Fiat-Backed Stablecoins and Deposit Tokens

  CBDCs Public Fiat-Backed Stablecoins Deposit Tokens
Issuer Central banks Non-bank entities Commercial banks
  • 4 live retail CBDCs
  • 36 retail and 27 w-CBDCs in pilot or development
  • Live, main link between traditional finance and DeFi /crypto exchanges
  • Largely experimental*
  • Sand dollar (Bahamas, live)
  • e-Naira (Nigeria, live)
  • e-CNY (China, pilot)
  • Digital euro (E.U., development
  • USDT (Tether, $81 B in circulation)
  • USDC (Circle, $31 B)
  • BUSD (Binance, $7 B)
  • J.P. Morgan Singapore dollars in Project Guardian
  • USDF coin, USDF Consortium
Backing Assets
  • Central bank balance sheet
  • 1:1 assets held by issuer to meet redemptions, typically held as HQLA
  • Claim on issuer, like regular deposits
*JPM Coin currently facilitates intrabank transfers across its permissioned chain Onyx, but only for JP Morgan bank clients. The concept of deposit tokens being pushed forward today is broader which is why it’s marked as experimental.
Source: FCAT Research, J.P. Morgan Chase, Atlantic Council. Data as of 4/10/23.

Why It Matters

Citi estimates that up to $5 trillion could move to newer digital money formats like CBDCs and stablecoins by 2030.19 With this scale, at stake is not just the type of tokenized money used to buy goods, but the structure and operations of the financial system itself. Succeeding in this transformation will require a careful balance between public and private sector innovation, with the public sector leading systemic design discussions and private firms like Fidelity as well as other incumbents and fintechs playing an important role in driving technological advancements. Progress will likely be made across three areas:

Payment rails. Modern money is a combination of public and private offerings. This will likely continue for the foreseeable future with CBDCs, stablecoins, and deposit tokens coexisting alongside legacy system upgrades like FedNow. In fact, the BIS envisions that path 1 and 2 will converge into a “unified, programmable ledger” that supports CBDCs, tokenized deposits, and digital assets.20 But getting there requires further exploration into programmability and interoperability. One such exploration from the NY Fed, in partnership with nine U.S. financial services companies, is called the Regulated Liability Network. This 12-week project is testing whether w-CBDCs, deposit tokens, and regulated stablecoins can coexist on the same shared network.21 Other projects focus on advancing specific capabilities like programmability or atomic settlement. Phase 1 of Singapore’s Project Orchard, for instance, explored the applications for a programmable “purpose-bound digital Singapore dollar,” while National Australia Bank tested whether its self-issued fiat backed stablecoin, AUDN, could execute a multi-currency cross-border settlement.22 As progress comes in spurts and stops, continued scanning for new projects and pilot results will be crucial to keeping a pulse on what is technologically feasible in this rapidly evolving field.

Financial markets. The transition to a financial services industry built on a blockchain-based infrastructure will likely take years to manifest, but progress is evident (see The Path to Blockchain Based Financial Markets). Moody’s is developing a stablecoin scoring system by analyzing reserve attestations for 20 stablecoins.23 ANZ bank has used its private fiat backed stablecoin, A$DC, to trade tokenized Australian carbon credit units, reducing FX costs.24 And DZ Bank is issuing deposit tokens onto a private chain to test operational efficiency benefits to corporate clients.25 These tokenized money explorations come amidst broader industry interest in institutional DeFi and tokenization platforms. For instance, T. Rowe Price, Wellington Management, and WisdomTree are using public chain Avalanche’s permissioned “Spruce” subnets to test FX and interest rate swaps via DeFi.26 They’re testing with valueless tokens, but in the future it’s not a stretch to think stablecoins or deposit tokens could be used instead. Additionally, tokenization platforms inch the industry closer to blockchain-based infrastructure adoption, facilitating tokenized bond issuance and intraday repos. As the financial services industry moves to adopt blockchain-based infrastructures, tracking these successes will help plot and plan integration roadmaps. Moreover, since blockchains underpin Web3 (see Web3: A Tokenized Web), broader adoption will not only accelerate Web3’s maturation but may also afford new opportunities to augment immersive experience (AR/VR) research.

Regulation and policy. It’s indeed become harder for some crypto and blockchain firms to find US-based banking partners. The Fed, FDIC, and OCC have issued joint statements discouraging traditional banks from engaging in business with crypto industry entities, while the SEC and CFTC continue to have crypto firms in their crosshairs.27 Yet, U.S. policymakers’ desires to mitigate systemic risks are well intentioned; unchecked risk can lead to real world damage like North Korea laundering $700 million via crypto-mixer ChipMixer.28 And while the SEC and CFTC continue to deadlock over how to classify Ethereum, the U.S. isn’t at a complete standstill. The Office of Science and Technology Policy recently sought input on digital assets and blockchains via an RFI and the Treasury Department completed its first illicit finance risk assessment of DeFi. Further, global policymakers are taking action. For example, Japan passed stablecoin-specific investor protection rules in 2022 and recently proposed a broad Web3 roadmap.29 Swiss regulators have decided that DLT-based securities recordkeeping doesn’t require a parallel system. And the E.U.’s MiCa, which brings crypto assets, issuers, and service providers under one regulatory framework, is expected to come into force in early 2024.

Signals to Watch

Projects that strengthen interoperability between legacy systems and blockchains. Key to adopting blockchain-based solutions in financial services is an understanding of tech integration risks: operational, liquidity, credit, regulatory, and cyber. In some cases, we will see DLTs deployed to interoperate with legacy systems, but in other cases we will see a more complete digital ecosystem be "spun-up" to support new, digitally pure products (i.e., stablecoins) or revolutionize other real-world assets or markets that are inefficient and don't have much systematic infrastructure supporting them (i.e., private markets, swaps, bi-lateral repo). Digital identity, zero knowledge proofs, oracles, and secure cross-chain bridges are some of the technology enablers to keep tabs on, while firms that offer KYC/AML compliant products and enterprise-grade security could have a leg up on the competition.

Demand for public, USD-backed stablecoins. There isn’t a clear distinction between private-issued stablecoins like ANZ’s A$DC and deposit tokens today. Circle views deposit tokens as a subset of stablecoins, while the USDC Consortium and Swiss Bankers Association maintain they are distinct. Regardless, watch to see if the increased use of deposit tokens impacts the demand for public, fiat-backed stablecoins like USDC which could be perceived as less secure. Another trend that could impact demand is the rise of new decentralized stablecoins. Flatcoins (i.e., Nuon) track the rate of inflation. And application specific stablecoins (i.e., Aave’s GHO, Curve’s crvUSD) are secondary tokens issued by DeFi protocols to boost revenue streams and could serve as a complement to fiat-backed stablecoins.30

Forthcoming stablecoin, crypto, DeFi, and CBDC standards. The Financial Stability Board plans to release recommendations for global stablecoin standards this July and is working to determine how DeFi activities should be regulated across different jurisdictions. The International Organization of Securities Commissions is also exploring the links between DeFi, stablecoins, crypto trading, lending platforms, and broader financial markets and plans to comment on crypto and stablecoin regulation by the end of the year. Further, the G7 intends to discuss how to help developing nations launch retail CBDCs. International standard setting bodies tend to guide regulators’ thinking, so their published guidance can signal what requirements and policy actions domestic regulators may enact in the future.

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1 https://www.atlanticcouncil.org/cbdctracker/
2 https://www.bloomberg.com/news/articles/2022-02-21/eastern-caribbean-dcash-outage-is-test-for-central-bank-digital-currencies;
3 (Muir, M). Central banks’ digital currency plans face public backlash. (March, 2023). Financial Times.;
4 https://www.atlanticcouncil.org/cbdctracker/
5 Coghlan, J. (2023). China’s digital yuan gets smart contract functionality alongside new use cases Cointelegraph.;
6 https://www.bostonfed.org/publications/one-time-pubs/project-hamilton-phase-1-executive-summary.aspx
7 Remarks by Under Secretary for Domestic Finance Nellie Liang During Workshop on “Next Steps to the Future of Money and Payments.” (Mar. 2023). U.S. Department of the Treasury.
8 https://www.atlanticcouncil.org/cbdctracker/
9 The mBridge to Somewhere: Central Banking Is Having Its Sputnik Moment. (2022, November 30). Lawfare;
10 https://www.coindesk.com/policy/2022/09/27/landmark-international-cbdc-test-deemed-success-bis-says/;
Multiple CBDC (mCBDC) Bridge. (2021). Bank for International Settlements (BIS)
11 Project Mariana: CBDCs in automated market makers. (2022). Bank for International Settlements (BIS)
12 https://www.newyorkfed.org/aboutthefed/nyic/project-cedar; ; https://www.newyorkfed.org/newsevents/news/financial-services-and-infrastructure/2022/20221110; https://www.mas.gov.sg/schemes-and-initiatives/ubin-plus
13 Credit ratings, research, tools and analysis for the global capital markets. Moody's.
14 https://www.coingecko.com/en/categories/stablecoins
15 https://libertystreeteconomics.newyorkfed.org/2022/02/the-future-of-payments-is-not-stablecoins/;
The Deposit Token: SBA white paper on a digital Swiss franc. (Mar. 2023). Swiss Bankers Association.; THE BANK-DELIVERED DIGITAL DOLLAR. (2022) USDF Consortium.
16 Butts, D. Japanese banks to launch, test stablecoins on “Japan Open Chain.” (Mar, 2023). Forkast News; https://www.coindesk.com/business/2023/03/02/three-japanese-banks-start-stablecoin-experiment/
17 Brazilian investment bank BTG Pactual launches dollar stablecoin. (April, 2023) Ledger Insights
18 Stellar Development Foundation (SDF). (n.d.). UNHCR launches pilot Cash-Based Intervention Using Blockchain Technology for Humanitarian Payments to People Displaced and Impacted by the War in Ukraine [Review of UNHCR launches pilot Cash-Based Intervention Using Blockchain Technology for Humanitarian Payments to People Displaced and Impacted by the War in Ukraine]. UNHCR https://decrypt.co/117312/un-taps-stellar-blockchain-send-war-impacted-ukrainians-usdc-stablecoins; Stellar Aid Assist. (n.d.). Stellar
19 Money, Tokens, and Games. (Mar. 2023) Citi
20 Carstens, A. (2023). Innovation and the future of the monetary system.(Feb. 2023). Bank for International Settlements (BIS)
21 https://www.newyorkfed.org/aboutthefed/nyic/facilitating-wholesale-digital-asset-settlement; https://regulatedliabilitynetwork.org/
22 MAS Report on Potential Uses of a Purpose-Bound Digital Singapore Dollar; https://www.mas.gov.sg/news/media-releases/2022/mas-report-on-potential-uses-of-a-purpose-bound-digital-singapore-dollar;
DBS introduces Singapore’s first programmable money live pilot for government vouchers. (2022). DBS; National Australia Bank completes cross-border stablecoin transactions.(Mar. 2023) Ledger Insights; NAB completes world-first with cross-border stablecoin transaction. (Mar. 2023). NAB News.
23 https://www.bloomberg.com/news/articles/2023-01-26/credit-rater-moody-preps-crypto-stablecoins-scoring-system?leadSource=uverify%20wall
24 https://www.coindesk.com/policy/2023/04/06/anz-bank-completes-carbon-credits-trading-as-part-of-australias-cbdc-pilot/
25 Insights, L. (2023, April 6). How banks are eyeing deposit tokens for B2B payments. Ledger Insights - Blockchain for Enterprise.
26 https://www.coindesk.com/business/2023/04/12/wisdom-tree-trowe-among-tradfi-firms-to-test-avalanches-blockchain-subnet/
27 https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20230103a1.pdf; https://www.reuters.com/legal/coinbase-issued-wells-notice-by-sec-2023-03-22/;
28 https://home.treasury.gov/news/press-releases/jy1391; ChipMixer Is Shut Down for Allegedly Laundering $3 Billion in Crypto,
29 https://www.coindesk.com/policy/2023/04/06/japan-releases-web3-white-paper-to-promote-industry-growth-in-the-country/
30 https://www.cnbctv18.com/cryptocurrency/crypto-flatcoins-and-why-they-are-better-than-normal-stablecoins-explained-15433351.htm;
31 https://www.coindesk.com/policy/2023/02/20/existing-stablecoins-wont-meet-forthcoming-global-standards-fsb/;
Kihara, L. G7 to discuss digital currency standards, crypto regulation. (2023, April 11). Reuters.
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