Two options initially emerged in the search for new digital cross-border payment infrastructures: central bank digital currencies (CBDCs) and stablecoins. The contest between them resembles Aesop’s fable of the tortoise and the hare, although, as it turns out, there is now a third animal in the race: the rhino of tokenised bank deposits. The other context in which this contest matters arises due to the growth in the tokenisation of real-world assets. Increasingly, ownership of assets such as commodities, trade documents and financial instruments is being represented by digital tokens on distributed ledgers.
These tokens allow assets to be transferred instantly and recorded on shared systems that reduce reconciliation and administrative costs. Once such assets move onto digital ledgers, larger efficiencies flow if the payment systems supporting them do likewise. If an asset transfers instantly on-chain, but payment still travels through traditional banking rails, some of the efficiency gain may disappear. Digital asset markets work best with digital money that can operate on the same distributed ledgers.
Until recently, many policymakers, myself included, expected CBDCs to fill this role. Like Aesop’s tortoise, CBDCs are cautious, slow moving and focused primarily on stability. Because they are issued by central banks, CBDCs carry no credit risk and provide settlement finality. For cross-border payments this is particularly attractive.
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