Tag: Payment System

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

Moneyness: Trump-proofing Canada means ditching MasterCard and Visa

I am a banking nerd I fear but the mechanics of payment systems is actually more interesting and important than I think is widely understood. I for one am regularly learning new insights on how the payment systems we take for granted actually works.

— Read on http://www.moneyness.ca/2025/03/trump-proofing-canada-means-ditching.html

Tony – From the Outside

Moneyness – it’s complicated

… arguably too complicated.

Interesting post here by JP Koning exploring the differences between the way PayPal’s two forms of payment mechanisms are regulated. His conclusion might surprise you.

Here is a link to his post

jpkoning.blogspot.com/2023/09/there-are-now-two-types-of-paypal.html

This is the short version if you are time poor

Which type of PayPal dollar is safer for the public to use? If you listen to Congresswoman Maxine Waters, who in response to PayPal’s announcement fretted that PayPal’s crypto-based dollars would not able to “guarantee consumer protections,” you’d assume the traditional non-crypto version is the safer one. And I think that fits with most peoples’ preconceptions of crypto. Not so, oddly enough. It’s the PayPal dollars hosted on crypto databases that are the safer of the two, if not along every dimension, at least in terms of the degree to which customers are protected by: 1) the quality of underlying assets; 2) their seniority (or ranking relative to other creditors); and 3) transparency.

Let me know what I (and JP) might be missing

Tony – From the Outside

Josh Younger on the origins of Eurodollars and Petrodollars

This may not be the definitive account of how the financial system we have today evolved but I got a lot of value out of the interview on the Odd Lots podcast. The role that Communist countries played in the inception of the Eurodollar market was certainly news to me. Josh cites Russia in his origin story but Wikipedia adds another version in which China was the country looking for a way to hold USD outside the USA.

You can find the Apple version of the podcast here

podcasts.apple.com/au/podcast/odd-lots/id1056200096

Tony – From the Outside

The stablecoin business model

JP Koning offers an interesting post here speculating on the reason why Wise can pay interest to its USD users but USDC can or does not. The extract below captures his main argument …

It’s possible that some USDC users might be willing to give up their ID in order to receive the interest and protection from Circle’s bank. But that would interfere with the usefulness of USDC. One reason why USDC is popular is because it can be plugged into various pseudonymous financial machines (like Uniswap or Curve). If a user chooses to collect interest from an underlying bank, that means giving up the ability to put their USDC into these machines.

This may represent a permanent stablecoin tradeoff. Users of stablecoins such as USDC can get either native interest or no-ID services from financial machines, but they can’t get both no-ID services and interest.

Let me know what I am missing

Tony – From the Outside

Moneyness: Zelle vs Interac e-Transfer, or why it’s so difficult to kickstart a payments network in the U.S.

One of the mysteries of life is why a country as advanced as the USA seems to be so far behind in its payment system. JP Koning suggests that the answer lies in part in the large number of banks that is a feature of the US system.

— Read on jpkoning.blogspot.com/2023/04/zelle-vs-interac-e-transfer-or-why-its.html

Tony – From The Outside

Moneyness: Let’s stop regulating crypto exchanges like Western Union

J.P. Koning offers an interesting contribution to the crypto regulation debate focussing on the problem with using money transmitter licences to manage businesses which are very different to the ones the framework was designed for …

The collapse of cryptocurrency exchange FTX has been gut-wrenching for its customers, not only those who used its flagship offshore exchange in the Bahamas but also U.S. customers of Chicago-based FTX US.

But there is a silver lining to the FTX debacle. It may put an end to the way that cryptocurrency exchanges are regulated – or, more accurately, misregulated – in the U.S.

U.S.-based cryptocurrency exchanges including Coinbase, FTX US, and Bianca.US are overseen on a state-by-state basis as money transmitters.

— Read on jpkoning.blogspot.com/2022/11/lets-stop-regulating-crypto-exchanges.html

Tony – From the Outside

The empire strikes back?

There is a lot written about how bad the US payment system is and why crypto solutions are the future. Against that background, Tom Noyes recently published an interesting post setting out his thoughts on a project JPM Chase is running to reengineer their payment system. Tom’s posts are normally restricted to subscribers but he has unlocked the first in a 5 part series exploring what JPM Chase is doing.

His post is definitely worth reading if you are interested in the future of banking. The short version is that the traditional banking system is not sitting still while crypto and fintech attempt to eat its lunch.

Tony – From the Outside

Those ACH payments

One of the mysteries of finance is why the USA seems to be so slow in adopting the fast payment systems that are increasingly common in other financial systems. Antiquated payment systems in TradFi is a frequent theme in DeFi or stablecoin pitches which argue that they offer a way to avoid the claws of the expensive, slow and backward looking traditional banks.

Every time I read these arguments in favour of DeFi and/or stablecoins, I wonder why can’t the USA just adopt the proven innovations widely employed in other countries. I had thought that this was a problem with big banks (the traditional nemesis of the DeFi movement) having no incentive to innovate but I came across this post by Patrick McKenzie that suggests that the delay in roll out of fast payment systems may in fact lie with the community banks.

The entire post is worth reading but I have appended a short extract below that captures Patrick’s argument on why community banks have delayed the roll out of improved payment systems in the USA

Many technologists ask why ACH payments were so slow for so long, and come to the conclusion that banks are technically incompetent. Close but no cigar. The large money center banks which have buildings upon buildings of programmers shaving microseconds off their trade execution times are not that intimidated by running batch processes twice a day. They could even negotiate bilateral real-time APIs to do so, among the fraternity of banks that have programmers on staff, and indeed in some cases they have.

Community banks mostly don’t have programmers on staff, and are reliant on the so-called “core processors” like Fiserv, Jack Henry & Associates and Fidelity National Information Services. These companies specialize in extremely expensive SaaS that their customers literally can’t operate without. They are responsible for thousands of customers using related but heavily customized systems. Those customers often operate with minimal technical sophistication, no margin for error, disconcertingly few testing environments, and several dozen separate, toothy, mutually incompatible regulatory regimes they’re responsible to.

This is the largest reason why in-place upgrades to the U.S. financial system are slow. Coordinating the Faster ACH rollout took years, and the community bank lobby was loudly in favor of delaying it, to avoid disadvantaging themselves competitively versus banks with more capability to write software (and otherwise adapt operationally to the challenges same-day ACH posed).

“Community banking and Fintech”, Patrick McKenzie 22 October 2021

Tony – From the Outside

Matt Levine on stablecoins

Quite a lot has been written about the backing of stablecoins but Matt Levine uses the Tether use case to pose the question how much it matters for the kinds of activities that Tether is used for …

The point of a stablecoin is not mainly to be a secure claim on $1 of assets in a bank account. The point of a stablecoin is mainly “to grease the rails of the roughly $1 trillion cryptocurrency market,” by being the on-blockchain form of a dollar. We talk somewhat frequently about stablecoins that are openly backed by nothing but overcomplicated confidence in their own value; to be fair, we mostly talk about them when they are crashing to zero, but still. The thing that makes a stablecoin worth a dollar is primarily that big crypto investors treat it as being worth a dollar, that they use it as a medium of exchange and a form of collateral and value it at $1 for those uses. Being backed by $1.003 of dollar-denominated safe assets helps with that, but being backed by $0.98 of dollar-denominated assets might be good enough?

Matt draws no distinctions above but I don’t I think his argument is intended to apply to stablecoins that aim to challenge the traditional payment service providers (“payment stablecoins”) operating in the broader financial system. It does however pose an interesting question about how much stability crypto traders really require.

Tony – From the Outside