Introduction

The rapid emergence of new payment instruments has prompted renewed questions regarding the nature, origins and design of money in ways not witnessed for decades. Some of these new market participants are competing directly with banks in the payments ecosystem, giving rise to a new shadow monetary system reminiscent of similar developments observed throughout financial history.

Among these innovations, stablecoins – introduced as a class of crypto-assets combining the technological advantages of distributed ledger technology (DLT), including disintermediation, transparency and enhanced security, with the low volatility traditionally associated with sovereign fiat currencies – have recently achieved a remarkable level of adoption while asserting themselves as a new form of private money. In response to the systemic risks posed by the widespread use of privately issued stablecoins, central bank digital currencies (CBDCs) are being developed as a “sovereign digital alternative” capable of preserving public monetary authority. Collectively, these emerging forms of digital money and the payment infrastructures supporting them have the potential to fundamentally reshape the existing monetary and payment landscape.

The digitalization of the financial system represents more than technological innovation. When coupled with geopolitical developments, it has the capacity to significantly influence national financial sovereignty. In particular, new monetary instruments that replicate the essential characteristics of sovereign currencies – serving as both a stable store of value and a unit of account – have become one of the most prominent tools in the global competition for geopolitical influence and monetary sovereignty.

To what extent can these innovations, which promise solutions to many of today’s challenges in the financial sector, realistically define the future of payments? This article first examines the architecture of the current monetary and payments system before assessing how emerging forms of digital money and their underlying infrastructures seek to transform that existing framework.

1. The Modern Monetary and Payment System

Unlike the historical commodity-based monetary systems founded on precious metals, the modern monetary system is state-backed, bank-centered and credit-based. Although central banks retain the exclusive authority to issue sovereign currency, the overwhelming majority of money circulating in advanced economies today exists in the form of commercial bank deposits. The stability of this system is reinforced by extensive public safety mechanisms, including deposit insurance schemes and insolvency regimes specifically designed to preserve confidence in the banking sector.

Within the contemporary monetary framework, money broadly exists in two principal forms. The first is public money, consisting of fiat currency issued as a liability of the central bank. The second is private money, represented primarily by deposits constituting liabilities of commercial banks. In addition, other forms of private money have emerged, including electronic money issued by financial technology companies and other non-bank financial institutions.

Commercial bank deposits, as a form of private money, fundamentally represent the bank's legally enforceable contractual obligation to receive, transfer and repay funds in accordance with its customers' instructions. Bank deposits are therefore enforceable legal claims rather than tangible assets. Their value derives from the expectation that these contractual promises will be honored. Although such claims are technically monetary liabilities from a legal perspective, they function as money in everyday economic life. Modern money therefore rests not on intrinsic physical value but on institutional trust and legal enforceability. The credibility and financial capacity of the issuing institution are considerably more significant than the physical characteristics of the monetary instrument itself.

Accordingly, although money is often perceived as a physical object issued and guaranteed by the state, contemporary financial systems are overwhelmingly composed of intangible private money recorded electronically by commercial banks as contractual claims against those institutions. Physical cash representing public money constitutes only a relatively small proportion of the overall money supply.

Confidence in this intangible form of private money is secured through the enhanced legal protections afforded to banks and bank deposits. These claims arise not from ordinary contractual relationships but from deposit agreements protected under banking legislation and supported by public guarantees. Even during periods of financial distress, banking systems are equipped with deposit insurance programs and government support mechanisms designed to ensure that depositors' claims remain protected. Furthermore, banking institutions occupy the central position within the global flow of digital money and operate under comprehensive regulatory and compliance frameworks.

The institutional safeguards protecting the banking sector simultaneously reinforce confidence in sovereign fiat currencies. Nevertheless, the emergence of alternatives to the traditional banking model has introduced new forms of private money, including money market funds (MMFs) and electronic money. Despite these developments, direct access to core payment infrastructures— particularly clearing and settlement systems —remains largely restricted to licensed banks. Non-bank financial institutions generally lack direct participation in these infrastructures, instead relying on alternative payment arrangements while remaining dependent, to varying degrees, on the banking system.

This evolutionary process reflects not only economic necessity but also decades of legal reform and institutional development. In the modern financial architecture, money ultimately represents a framework of trust jointly sustained by public authority and private financial institutions under a comprehensive legal regime.

Payment systems constitute the fundamental infrastructure enabling the exchange of goods and services in the modern economy. They encompass far more than the mere transfer of funds, consisting instead of sophisticated operational procedures and legal frameworks governing the movement of money. A payment transaction generally begins with the initiation and verification of payment instructions, followed by the clearing process and ultimately completed through settlement. These processes involve a network of transaction participants and one or more financial institutions, the transfer of financial assets among those participants, and an established framework of rules governing the rights, obligations and execution of the transfer.

Payment systems are generally classified into retail payment systems and wholesale payment systems. Wholesale payment systems, used primarily for transactions between banks and financial institutions, typically operate through real-time gross settlement (RTGS) mechanisms and process high-value transactions. Retail payment systems, by contrast, facilitate high-volume, low-value transactions between consumers and businesses and generally do not provide immediate final settlement.

Modern payment systems enable payments to transcend geographical boundaries while supporting large-scale transaction processing. They also provide enhanced traceability and automation. Particularly where settlement is deferred rather than immediate, these systems incorporate various mechanisms designed to mitigate liquidity and credit risks among participants.

Cross-border payments, however, remain heavily dependent on correspondent banking networks due to technical, legal and regulatory differences between jurisdictions. As a result, such transactions are often costly, time-consuming and characterized by limited transparency. Although financial technology companies have introduced alternative payment solutions that contribute significantly to the transformation of payment services, these solutions generally continue to rely, directly or indirectly, on the existing correspondent banking infrastructure.

2. Is There a Need to Transform the Existing Framework?

Despite being underpinned by extensive legal safeguards and public guarantees, the banking system has experienced repeated failures, both internally and through its interactions with non-bank financial intermediaries. This complex and interconnected structure carries significant risks that must be managed through lessons drawn from past crises. The extensive compliance frameworks designed to mitigate these risks have, however, left the traditional banking system struggling to keep pace with technological innovation and the evolving needs of society.

Even today, a substantial proportion of the world’s population — including individuals living in advanced economies — remains excluded from access to essential financial services, creating a persistent barrier to financial inclusion and social equity. Moreover, payment systems continue to suffer from considerable inefficiencies arising from high compliance costs and procedural complexity. These shortcomings are particularly evident in cross-border payments, where legal and operational differences between jurisdictions prevent the widespread adoption of real-time payment mechanisms. As the pace of international trade accelerates, delays in payment settlement reduce economic efficiency while preventing idle liquidity from being deployed productively during lengthy settlement cycles. Likewise, the lack of interoperability between payment rails continues to impede the efficient allocation of liquidity. It is precisely at this point that digital forms of money promise a paradigm shift by offering potential solutions to many of these longstanding structural challenges.

Although distributed ledger technology (DLT) initially emerged as a decentralized alternative to centralized financial infrastructures, many of its most transformative applications today focus on addressing these practical deficiencies. Two instruments have attracted particular attention in this regard: central bank digital currencies (CBDCs), designed as universally accessible digital representations of sovereign legal tender, and stablecoins, which employ various stabilization mechanisms to maintain a stable value by referencing a specific currency, asset, or basket of currencies and/or assets.

1. A Technical Overview of CBDCs and Stablecoins

Tokenization—the process of digitally representing claims on a programmable platform—constitutes a significant development in digital record-keeping and asset transfers. A tokenized asset represents ownership rights and the characteristics of a traditional asset through programmable code, commonly referred to as a smart contract, operating on a distributed ledger or blockchain infrastructure. A CBDC represents central bank money recorded on a distributed ledger or similar technological platform. Stablecoins, by contrast, are crypto-assets that maintain a stable value through various stabilization mechanisms linked to a specific currency, asset, or basket of currencies and/or assets. Among the various stablecoin models, asset-backed stablecoins pegged on a one-to-one basis to sovereign fiat currencies most closely resemble a digital form of money.

CBDCs and fiat-backed stablecoins share many characteristics, particularly their common objective of maintaining price stability. Nevertheless, despite these similarities, they differ fundamentally in terms of the risks they generate and the scope of their potential contribution to the financial system. The principal distinction lies in their issuers and the nature of the value they represent. CBDCs can be issued exclusively by central banks, whereas stablecoins are issued by private entities.

While a fiat-backed stablecoin references the value of an underlying sovereign currency, a CBDC constitutes a direct digital representation of central bank money. Stablecoins possess an independent legal existence separate from the assets to which they are pegged, whereas a CBDC has no autonomous value beyond that of the sovereign currency it represents. Stablecoins are generally issued on public blockchain networks. CBDCs, on the other hand, may be designed either as retail CBDCs, accessible to the general public, or wholesale CBDCs, intended exclusively for interbank and wholesale financial transactions.

The design, functionality and systemic impact of CBDCs vary depending on technical and policy choices. They may adopt direct or indirect architectures, account-based or token-based access models, and centralized, distributed or hybrid ledger infrastructures. For example, systems built on distributed ledger technology may prioritize data integrity and transaction transparency, whereas a direct CBDC architecture would enable central banks to establish direct relationships with end users. Such an approach, however, could also substantially increase the operational responsibilities of central banks.

2. What Do Digital Forms of Money Promise to Change?

When implemented within a robust and clearly defined legal framework, digital forms of money have the potential to facilitate a more efficient, secure and innovative financial ecosystem. One of their most significant advantages lies in addressing the idle liquidity that currently arises in cross-border payments due to differences in operating hours across jurisdictions. By leveraging DLT-enabled real-time, programmable and time-independent settlement, financial resources could be utilized more efficiently and returned to productive economic activity more rapidly. Likewise, synchronized settlement mechanisms could reduce credit and operational risks while strengthening the overall resilience of the financial system. The emergence of new payment networks may also expand market competition, reduce dependence on existing payment infrastructures, and enable states to lessen external financial dependencies, thereby strengthening their financial sovereignty.

Digital forms of money could also substantially improve financial inclusion by extending access to financial services to populations currently underserved by the conventional banking system. In addition, they may reduce the significant costs associated with correspondent banking, telecommunications infrastructure, payment processing, clearing fees and compliance obligations in cross-border transactions. They also hold the potential to alleviate legal uncertainty arising from divergent contractual obligations across jurisdictions and the lack of standardization among payment service providers. Furthermore, the enhanced transparency and traceability inherent in distributed ledger technology may significantly improve the detection and prevention of illicit financial activities while facilitating greater international regulatory cooperation and harmonized compliance standards.

If digital forms of money are to play a meaningful role in improving cross-border payments, they must be capable of competing alongside existing payment solutions on equal terms with respect to cost, speed, accessibility and transparency. Their entry into existing or emerging payment markets may stimulate competition and encourage further improvements in alternative cross-border payment mechanisms. In doing so, they could contribute to the development of a more robust global payment infrastructure while providing users with a broader range of secure and flexible payment options.

CBDCs, in particular, combine the public trust associated with sovereign fiat currency with the speed, efficiency and programmability offered by digital technologies. As such, they have the potential to establish a new model of financial innovation situated at the intersection of institutional authority and technological advancement. Beyond functioning merely as a payment instrument, CBDCs may transform the implementation of monetary policy while contributing to the institutional infrastructure of the digital economy. The ability of individuals to hold accounts directly with central banks through certain CBDC models may enhance financial inclusion while fundamentally reshaping the traditional model of financial intermediation. Although such developments raise important questions concerning central bank independence, the role of commercial banks and the dynamics of private financial markets, CBDCs may simultaneously strengthen central banks' direct control over the money supply and enhance the effectiveness of monetary policy.

Central banks currently influence market interest rates through operational tools designed to achieve price stability, while liquidity conditions within the banking sector play a crucial role in determining the effectiveness of monetary policy transmission. CBDCs possess the potential to fundamentally reshape this framework.

Furthermore, interest-bearing CBDCs could allow central banks to transmit monetary policy decisions more directly throughout the economy by extending their reach beyond the banking sector itself, thereby strengthening the effectiveness of monetary policy transmission mechanisms.

Conclusion

Stablecoins are no longer merely technical instruments confined to crypto-asset markets. Circle's payment network, Visa's and Mastercard's stablecoin settlement and card initiatives, together with Stripe's stablecoin accounts and API-based solutions developed through its acquisition of Bridge, demonstrate that stablecoins have emerged as a new arena of competition within the global financial infrastructure.

The future role of digital forms of money should not be determined solely by the pace of technological innovation or the capacity of market participants to develop new financial products. Stablecoins, tokenized deposits, central bank digital currencies and electronic money models all present significant opportunities to accelerate payments, reduce transaction costs, facilitate cross-border transfers, expand programmable financial services and promote financial inclusion. At the same time, however, their widespread adoption has the potential to fundamentally affect the balance of the monetary system, financial stability, consumer confidence, the resilience of payment infrastructures and the monetary sovereignty of states. Consequently, the primary objective should be to establish a balanced monetary framework capable of combining the trust associated with public money with the speed, flexibility and innovative capacity of the private sector.

Although digital forms of money offer considerable promise as payment instruments, regulators, businesses and consumers continue to have legitimate grounds for exercising caution. Key concerns include the quality and custody of reserve assets, the solvency of issuers, the enforceability of redemption rights, operational resilience, cybersecurity, anti-money laundering and counter-terrorist financing obligations, the protection of customer assets, and the challenges associated with cross-border supervision. Moreover, the possibility that globally adopted private digital currencies could place pressure on domestic currencies, weaken the effectiveness of central bank monetary policy, or concentrate critical payment infrastructures in the hands of a limited number of private actors should not be overlooked.

Against this background, the central challenge for the European Union and other legal systems is neither to prohibit digital forms of money outright nor to permit their unrestricted expansion. Rather, regulators should establish a proportionate and predictable legal framework that recognizes the economic and technological potential of these instruments while simultaneously safeguarding financial stability, monetary sovereignty, payment security and user rights. The successful monetary system of the future will not simply deliver faster and less expensive payments; it will also be trustworthy, transparent, resilient in times of crisis, and capable of maintaining an appropriate balance between the public interest and private-sector innovation.