Long reads

From cash to crypto: Understanding the changing face of money

Vid Hribar

Vid Hribar

Strategic Partnerships and Ecosystems Analyst, RBI

This piece was co-authored by Gerald Ruschka, digital banking leader at RBI. 

Money is a topic that often escapes active consideration. When making transactions, whether in-store or online, our primary concerns revolve around the sufficiency of funds and the chosen payment method (for example, cash or card.) – rarely do we contemplate the form of money used. However, when it comes to transaction privacy, who is the issuer, and associated risks in case of issuer bankruptcy, distinctions between the various forms of money become important.

While the topic of forms of money was in the past often reserved for academics, it has recently been getting more attention with the rise of cryptocurrencies (especially Bitcoin), digital Euro, and lately stablecoins.

This article aims to provide outlook and structure to the evolving monetary landscape, from the perspective of financial institution employees.

Existing forms of money are changing

Let's begin by examining the existing forms of money, categorised into public and private money.

Chart source: Vid Hribar, strategic partnerships and ecosystems analyst, RBI

Public money that is issued by respective countries’ central banks in the form of cash (banknotes and coins) serves as public money for retail clients. Primary use of cash is for daily spending needs, such as buying groceries or tickets; however, due to its physical form, it can be challenging (and is not preferred due to compliance reasons) for larger transactions. One crucial characteristic of cash is its privacy – it's not possible to trace where cash came from or what it was used for, providing users with a high level of privacy.

On the other hand, there is also public money available exclusively to authorised wholesale participants, such as banks. These account balances are known as central bank reserves and represent deposits that banks hold in real-time gross settlement systems (such as TARGET2 at the European Central Bank, ECB). This form of money is used to manage wholesale settlements among participants with access to the settlement systems like TARGET2.

Conversely, private money is issued by banks or other financial institutions. The most common types are commercial bank money (balances in bank accounts) and e-money, issued by e-money providers like PayPal. The primary difference between these forms of money lies in their backing.

Commercial bank money is not 100% backed by reserves but rather supported by the bank's balance sheet, as banks use deposits for further lending. In contrast, e-money must be fully backed, requiring the issuer to hold reserves on a separate account in the form of deposits at commercial banks or other high-quality liquid assets such as government bonds.

Recent trends are challenging traditional forms of money

The use of cash has been declining for some time alongside the shift towards a more digital society, however there is concern that retail clients may lose access to public money. This decline in cash usage in favor of other forms of money for transactions raises potential issues for financial inclusion, privacy, and the adaptability of certain populations, especially the elderly.

Concurrently, as cash usage decreases, cards are becoming more prevalent. Majority of these transactions are now conducted on VISA and Mastercard networks, both of which are US companies. This poses a potential threat to the EU's geopolitical resilience, as a robust payment system is a backbone of the economy.

Another significant trend is the adoption of blockchain. More assets are being tokenised, and while the market for tokenised assets is still in its early stages, with increased regulation, it is expected to witness substantial growth in the coming years.

Finally, there are additional trends such as the shift towards digital wallets, the rise of digital currencies like Bitcoin, and regulatory changes that further accelerate the aforementioned trends.

To address these shifts, new forms of money have emerged, intended to complement rather than replace existing forms:

  • A new proposed digital version of cash is the retail central bank digital currency (CBDC) or digital Euro
  • A new version of central bank reserves comes in the form of a wholesale CBDC
  • There are ideas to shift deposits to the blockchain and create tokenised deposits
  • A new version of e-money is represented by stablecoins
  • Cryptocurrencies are digital currencies based on blockchain; they lack an entity that issues them, making them non-liabilities of public or private issuers

In the following, we analyse the three most relevant emerging forms of money: retail CBDC or digital Euro, stablecoins, and wholesale CBDC. Tokenised deposits are excluded as they are still in a more conceptual phase, especially in Europe, while stablecoins are already present in the market. Cryptocurrencies are also excluded as they do not currently fulfill the functions of money (store of value, medium of exchange or unit of account), at least not in our part of the world.

The digital euro is in progress

Digitized Central Bank Money is a logical outcome of the massive growth in eCommerce, an increase of +20%in e-shoppers within last ten years, which equals to 75% of EU internet users, where cash is not useable. The general decline of coins and bills even in the physical stores (as shown in the statistic below) also demonstrates that payers prefer cashless payment methods.

In the last three years, the number of cash payments has declined by 13%, down to 59% for daily spending at POS. Additionally, as mentioned above, one of the big concerns for the ECB was that current cashless Cross Border Payments within Europe are almost completely executed via US corporates, VISA and Mastercard. According to the ECB, this leads to a lack of sovereignty and a significant flow of the value creation around payment business out of Europe.

In 2020, the EC started to investigate the possibilities of developing a new form of money as a response to the increasing velocity of cash decline and protecting EU interests. This was done by conducting studies, developing reports, and setting up the Rulebook Development Group (RDG). Thus, the concept of a digitised version of the euro was born, with the aim to offer a digital payment option based on public money rather than private money. Most important cornerstones of the digital euro solution include no interest, limited holding amount, and full anonymity of the individual.

The objective of the RDG is to write the foundation for the digital euro payment scheme. Independently, the EC has created a draft regulation to provide the digital euro with a legal tender status (there will be a legal issuing and an acceptance obligation).

The current schedule calls for a public issuance of the digital euro (earliest) in 2028.

Stablecoins are becoming increasingly prevalent

Stablecoins share similarities with traditional e-money but have fundamental differences. Built on blockchain, stablecoins are designed to be more open and accessible compared to e-money, which is confined within the issuer's ecosystem. Stablecoins can also be transferred to third-party wallets, contributing to greater network effects.

While both stablecoins and e-money are centralised, 1:1 backed, and redeemable at all times, the transparency of stablecoin transactions stands out in comparison to the private ecosystem, where only the issuer has access to the transaction log.

Initially used for cryptocurrency trading, stablecoins have expanded their use cases beyond crypto. They are increasingly employed for settling tokenised assets (particularly as more assets are being tokenised), which requires a form of money compatible with blockchain.

Notably, the efficiency gains from tokenisation, including the cash leg, are maximized when the entire process is executed on blockchain. The promise of stablecoins, enabling faster and cheaper payments, is gaining traction beyond the blockchain native companies. Major players like VISA are exploring ways to streamline settlement processes using stablecoins.

Additionally, blockchain facilitates the inclusion of programmable logic into stablecoins, allowing for the implementation of rules like compliance and spending limits, enhancing risk controls and operational efficiency.

Observations over the past few years indicate a significant growth in stablecoin volume, with a current market cap of around USD 138 billion. It's worth noting that many stablecoins, such as USDT and USDC, are issued by non-bank institutions, exhibiting varying levels of transparency.

In the euro market, stablecoins are currently less prevalent compared to the USD market, but it is anticipated that more euro stablecoins will emerge. Regulatory clarity provided by MiCA (Markets in Crypto Assets Regulation), effective since June 2023 and applicable from June 2024, is expected to drive the growth of euro stablecoins. The positive interest rate environment further contributes to a favorable business case for stablecoin issuers as they back stablecoins with deposits or other assets.

More about stablecoins is available in our previous articles on CEE Fintech Atlas.  

Exploring the possibilities of wholesale CBDCs

Developments have also emerged in the area of Wholesale Central Bank Digital Currency (wCBDC), representing a digital form of money exclusively accessible to financial institutions.

In 2023, the ECB initiated a project to explore potential solutions for settling wholesale financial transactions with central bank money on distributed ledger technology platforms. The ECB aims to test three different solutions proposed by central banks (Deutsche Bundesbank, Banque de France, and Bank of Italy).

Two solutions involve connecting existing payment platforms (TARGET2 or TIPS, a real-time 24/7 settlement system) to blockchain, while the third goes a step further – creating blockchain-based wholesale CBDC tokens. The primary use case for all three solutions is a Delivery vs. Payment (DvP) transaction to settle tokenised assets or securities.

The ECB has invited market participants, including banks, to participate in the testing phase scheduled for 2024. During this phase, participants will conduct trials using various solution approaches, which will later be compared. The primary goal is to assess whether blockchain settlement should receive support from the ECB and national central banks. By the end of 2024, a decision is expected on which solution should be introduced to the market.

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