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Forms of Money, How They are Stored, How They Move

While exploring the impact of stablecoins on the future of money, I have found that public discussion of digital money often tends to conflate three things that are analytically distinct: the monetary instrument itself, the form in which it is stored or represented, and the infrastructure used to move it between parties. I believe that separating them assists understanding what is genuinely new about stablecoins and tokenised deposits, what is merely a change of form or rail, and where the real regulatory and systemic questions lie.

The three questions are: 

• what is the money (the underlying claim and who stands behind it)? 

• how is it held (the representation or storage form)? and 

• how does it move (the payment rail or transmission infrastructure)? 

Each has a different answer for central bank money, bank deposits, and fiat-backed stablecoins — and the differences matter at each level independently.

The Monetary Instrument

The monetary instrument is the underlying claim: i.e. the asset you actually own when you hold money. For central bank money, this is the liability of the central bank — a claim on the state that is backstopped by the sovereign’s taxing power and the central bank’s capacity to create reserves. For commercial bank deposits, it is a claim on an individual bank, convertible at par into central bank money on demand, and backstopped by deposit insurance, banking regulation, and lender-of-last-resort facilities. For a fiat-backed stablecoin, it is a claim on the issuer, redeemable for the reference fiat currency, and backstopped only by the reserve assets held and the legal framework governing redemption.

The monetary instrument is defined by who is liable (central bank, commercial bank, or stablecoin issuer), what backs that liability (sovereign authority, deposit insurance and capital, or reserve assets), and what rights the holder has (redemption at par, deposit insurance coverage, bankruptcy priority).

These are properties of the instrument regardless of how it is stored or how it is transmitted. A bank deposit is the same instrument whether it is accessed via a cheque book, a debit card, an online banking portal, or a tokenised deposit on a blockchain. The underlying claim — and its legal, regulatory, and credit characteristics — does not change because the representation changes.

The Representation and Storage Form

The representation form is how the monetary instrument is recorded, held, and evidenced. This is the dimension most directly affected by digitisation. Historically, representation forms have included: physical notes and coins (bearer instruments, value in the object); entries in a bank’s paper or electronic ledger (account-based, value in the record); and book entries in a central bank’s reserve account system (account-based, institutional access only).

Tokenisation is a change of representation form, not of monetary instrument. A tokenised deposit is the same bank deposit claim represented as a programmable token on a distributed ledger rather than as an entry in the bank’s conventional core banking system. The EBA (December 2024) is explicit on this point for EU law: a tokenised deposit remains a deposit for all legal and regulatory purposes.

The token is the envelope; the deposit is the contents. Similarly, a fiat-backed stablecoin token is the representation of a claim on the issuer — the token itself is not the money, it is the bearer instrument evidencing the money claim.

The representation form matters because it determines: programmability (can conditional logic be embedded?); composability (can the instrument interact with other on-chain instruments without conversion?); and bearer versus account-based character (does transfer require identity verification, or does possession of the token suffice?).

But changes in representation form do not, by themselves, change the nature of the underlying monetary claim or its regulatory treatment — though they may reveal that the regulatory framework was not designed with that representation in mind, creating classification gaps.

The Payment Rail

The payment rail is the infrastructure used to transmit value between parties: the pipes, protocols, and settlement systems through which money moves. The rail is analytically independent of both the instrument and its representation form. The same bank deposit can be transmitted via SWIFT (correspondent banking), Faster Payments (domestic push), RTGS (large-value settlement), a debit card network (Visa/Mastercard acquiring infrastructure), or a mobile payment app (M-Pesa, Venmo). The instrument does not change; the rail does.

For stablecoins, the blockchain is the payment rail. Solana, Ethereum, Tron, and Base are rails — infrastructure choices that determine transaction speed, cost, finality, programmability, and geographic accessibility. A USDC token on Solana and a USDC token on Ethereum represent the same underlying claim on Circle (the issuer) but travel on different rails with different properties. The rail choice affects the user experience and operational risk profile of a payment, but does not change what the USDC token is: a claim on Circle’s reserve pool, redeemable 1:1 for US dollars.

Some implications

The conflation of rail and instrument is I believe the source of several analytical errors that appear in policy discussions. When commentators argue that stablecoins are ‘just a payment method’, they are (correctly) identifying that the blockchain is a rail, but they may also be (incorrectly) implying that this makes the stablecoin token equivalent to a bank deposit. Comparisons of stablecoin transactions with credit card payments are I think equally problematic. It is rare in my experience to see much discussion of how fast payment systems stack up against stablecoins in terms of cost and speed. The added cost and complexity of the on/off ramps with the traditional banking system may also be missing.

The rail properties of a blockchain — open access, programmability, pseudo-anonymous transfer, irreversible finality — are genuine and consequential differences from RTGS or card networks. But there are significant differences between a stablecoin and a bank deposit at the instrument-level: who is liable, what backs the claim, whether deposit insurance applies, and whether settlement occurs in central bank money.  

A further rail-level property requires explicit treatment: settlement finality on public blockchains is probabilistic, not absolute. On proof-of-work networks, finality accumulates over multiple block confirmations; on proof-of-stake networks such as Ethereum, economic finality is reached after two checkpoint epochs (approximately 12–15 minutes), though transactions may be practically irreversible within one or two blocks in most conditions. Solana’s optimistic confirmation model offers near-instant practical finality but with a technically distinct guarantee than Ethereum’s checkpoint-based economic finality. This contrasts with RTGS systems (Fedwire, TARGET2, CHAPS) where settlement is legally final and irrevocable the moment it is posted to the central bank’s books. 

The finality distinction has direct institutional adoption implications: settlement finality is a legal and operational requirement for securities settlement (Delivery vs. Payment), large-value interbank transactions, and any use case governed by the EU’s Settlement Finality Directive or equivalent. A public blockchain rail that cannot offer the same finality guarantee as an RTGS system is not a direct substitute for those use cases until either the regulatory framework recognises on-chain finality as legally equivalent, or wholesale CBDC rails provide a bridge between blockchain settlement and central bank money finality.

I suspect that I am only scratching the surface of this topic and I am straying way outside my area of expertise so treat the above with caution. I am writing it down to clarify for myself the extent to which I have an understanding of the topic.

Feedback welcome on anything I have wrong or that I am missing

Tony – From the Outside

Capital requirements – looking past the numbers

Too often I see discussions of capital requirements reduced to simple comparisons of nominal factors like risk weights and capital ratios. This is particularly the case when looking at the impact of these factors on competition between large and small banks.

This post by Cetier1 uses New Zealand data to highlight the discrepancy between official requirements and market-driven behavior. It argues that while regulatory capital requirements set a floor, the market’s perception of risk and return ultimately dictates banks’ actual capital levels. Cetier illustrates that smaller banks often hold significantly more capital than required, while larger, “too big to fail” institutions may hold less, suggesting the market’s acceptance of their lower ratios.

Finding ways to help smaller banks compete with the big banks remains a worthy objective but this I think offers a useful reminder that risk weights are just one part of a complex topic.

Tony – From the Outside

Stablecoin crossover with mainstream finance grows

Unfortunately most of this post by Marc Rubinstein is behind a paywall but the free to read component offers a useful summary of areas where stablecoins are starting to extend their utility into conventional areas of payment platforms and not just being a vehicle for trading crypto.

Personally I have no interest in crypto trading and I still find the instant payment capabilities provided by my (Australian) bank to be more than adequate but this is a development worth keeping an eye on

I may be missing something – let me know

Tony – From the Outside

New money, old money – Bank Underground

Always on the look out for things we can learn from history. In that spirit here is an interesting post on a Bank of England blog that explores what lessons the switch from coins to paper money might offer for the expansion of digital currencies.

They identify five lessons. The one that resonates with me is that the adoption of new forms of money can depend on the extent of shortages in the conventional forms …

“Possible lessons for the adoption of digital currencies

Can we learn anything from the switch from coin to paper in the 1690s that might be relevant to any adoption of digital currencies today? One lesson is that shortages of money are a powerful force in stimulating new forms of money to emerge. In the 1690s the extreme shortage of silver created a compelling reason for merchants to adopt new paper currency.  Arguably, this is a force driving some new forms of digital money to emerge – conventional forms of money being incompatible, or lacking the functionality to use, in some digital settings, creating an effective shortage.”

Tony – From the Outside

Loss absorption under bail in – watch this space

So much going on in banking; so many lessons and precedents. The way in which Credit Suisse’s Additional Tier 1 securities were applied (and equally as importantly) the way the market reacts is one I think is definitely worth watching.

It was easy to miss this detail given how much has been going on but John Authers (Bloomberg Opinion) neatly sums it up …

Holders of “Additional-Tier 1 (AT-1)” bonds have been wiped out. Credit Suisse’s roughly 16 billion Swiss francs ($17.3 billion) worth of risky notes are now worthless. The deal will trigger a complete writedown of these bonds to increase the new bank’s core capital — meaning that these creditors have had a worse deal than shareholders, who at least now have some stock in UBS.

Bloomberg Opinion “And then there was one”, Points of Return, John Authers 29 March 2023

The relative treatment of shareholders and AT Creditors was, for me at least, a surprise. In the conventional capital stack, shareholders absorb losses before all stakeholders. I did a post here setting out my understanding of loss absorption under bail-in. Christopher Joye helpfully explained that the Swiss seem to do bail in differently …

In contrast to many other bank hybrids, including those issued by Aussie banks, CS bank hybrids cannot, and do not, convert into equity in this scenario (ie, Aussie bank hybrids are converted into equity before a write-off). Instead, the CS hybrids must legally go directly to write-off. They further do not permit any partial write-off: the only option is for the regulator to fully write-off these securities.

“UBS buys Credit Suisse in CHF3 billion deal, bonds fully protected as AT1s are zeroed” Christopher Joye, Livewire 20 March 2023

John Authers offers some more context …

“Additional Tier 1” capital was a category introduced under the Basel III banking accords that followed the GFC, with the intention of providing banks with more security. Holders of the bonds were to be behind other creditors in the event of problems. In the first big test of just how far behind they are, we now know that AT1 bondholders come behind even shareholders.

…. he goes on to note that, while limiting moral hazard requires that someone be at the pointy end of loss absorption, the Swiss precedent poses the big question – who wants to buy Swiss style Additional Tier 1 knowing what they know now …

This follows the logic of the post-crisis approach, and it limits moral hazard. The question is whether anyone will want to hold AT1 bonds after this. The market response will be fascinating, and it remains possible that the regulators have avoided repeating one mistake only to make a new one.

The Swiss logic of favouring shareholders is not obvious to me so maybe I am missing something. It might offer some short term advantage but I am with John Authers on this one. Who signs up for this deal next time. We are definitely living in interesting times.

Tony – From the Outside

Solvency, liquidity and dark magic

The two terms are frequently used interchangeably but I am in the camp that being pedantic is useful in this particular case. In that context hat tip to Matt Levin at Bloomberg for another well worth reading opinion column exploring what is going on with FTX

You can find his column here. There is a Bloomberg paywall but you can also access Matt’s material by signing up to his daily newsletter (highly recommended). The whole piece is worth reading but two short extracts below capture the main points.

First up solvency …

One other point here is that if this is the story, then it is not a liquidity crisis but a solvency one. That is, the problem is not a timing mismatch, in which FTX’s customers asked for their cash back but FTX did not have enough ready cash because it had long-term but money-good loans out. The problem is that FTX took its customers’ money and traded it for a pile of magic beans, and now the beans are worthless and there’s a huge hole in the balance sheet.

And some dark magic …

If you think of the token as “more or less stock,” and you think of a crypto exchange as a securities broker-dealer, this is completely insane. If you go to an investment bank and say “lend me $1 billion, and I will post $2 billion of your stock as collateral,” you are messing with very dark magic and they will say no.[9] The problem with this is that it is wrong-way risk. (It is also, at least sometimes, illegal.) If people start to worry about the investment bank’s financial health, its stock will go down, which means that its collateral will be less valuable, which means that its financial health will get worse, which means that its stock will go down, etc. It is a death spiral. In general it should not be possible to bankrupt an investment bank by shorting its stock. If one of the bank’s main assets is its own stock — is a leveraged bet on its own stock — then it is easy to bankrupt it by shorting its stock.

If you want to dig deeper into the solvency versus liquidity question I had a go at the issue here

Tony – From the Outside

Self regulation in DeFi

This article in Wired offers a useful summary of how some motivated individuals are attempting to use the transparency of the system to control bad actors.

It is short and worth reading in conjunction with this paper titled “Statement on DeFi Risks, Regulations, and Opportunities Commissioner Caroline A. Crenshaw that sets out a US regulator’s perspective on the question of how DeFi should be regulated. This extract from the paper covers the main thrust of her argument in favours of formal regulation

While DeFi has produced impressive alternative methods of composing, recording, and processing transactions, it has not rewritten all of economics or human nature. Certain truths apply with as much force in DeFi as they do in traditional finance:

– Unless required, there will be projects that do not invest in compliance or adequate internal controls;

– when the potential financial rewards are great enough, some individuals will victimize others, and the likelihood of this occurring tends to increase as the likelihood of getting caught and severity of potential sanctions decrease; and

– absent mandatory disclosure requirements,[10] information asymmetries will likely advantage rich investors and insiders at the expense of the smallest investors and those with the least access to information.

Accordingly, DeFi participants’ current “buyer beware” approach is not an adequate foundation on which to build reimagined financial markets. Without a common set of conduct expectations, and a functional system to enforce those principles, markets tend toward corruption, marked by fraud, self-dealing, cartel-like activity, and information asymmetries. Over time that reduces investor confidence and investor participation.

Conversely, well-regulated markets tend to flourish

“Statement of DeFi Risks, Regulations and Opportunities” by Commissioner Caroline A Crenshaw, The International Journal of Blockchain Law, Vol. 1, Nov. 2021.

Tony – From the Outside

JP Koning’s “over consumptionist” theory of Bitcoin and decentralisation

Interesting post by JP Koning exploring the current debate about the value of Bitcoin and its energy demand.

There are two extreme theories about cryptocurrency energy consumption, both of them bitterly opposed to each other. The first I’ll call the big waste theory. Cryptocurrencies such as Bitcoin and Ethereum serve no useful purpose. Yet they are sucking up huge amounts of useful electricity. Let’s ban them.

The second theory is the vital cog theory. Cryptocurrencies are a useful bit of global financial infrastructure. And so the huge amounts of energy that they are consuming is beneficial. Let’s not impede them.

“The overconsumption theory of bitcoin (and decentralization in general)”, JP Koning, May 2021

Koning offers an alternative “overconsumptionist theory” – worth reading

Tony – From the Outside