Central banks worldwide are actively developing their own digital currencies, with 98% of regulators having projects in various stages of progress. However, other payment instruments are also gearing up to enter the market, including private tokenized money – stablecoins linked to fiat currencies – and tokenized deposits. These represent the issuer’s monetary obligation (not necessarily from the central bank), digitally recorded on a distributed ledger. How will these innovations impact the nature of money and the structure of the monetary system? What models of private tokenized money issuance are emerging, and what opportunities will they create for users? These and other intriguing questions were explored during the Digital Finance scientific seminar at the Institute of Economics of the Russian Academy of Sciences, where Dmitry Kochergin, Chief Researcher at the Institute, presented a report. Here, we highlight the most important and interesting aspects of the seminar.
Complementary, not substitutes
In his report, Tokenized Private Money: Economic Content, Issuance Models, and Their Role in the Future Monetary and Credit System, Dmitry Kochergin delved into the economic essence of tokenized money issued by private entities, exploring their forms and analyzing various issuance models.
In particular, he noted that stablecoins pegged to fiat currencies and tokenized deposits represent two competing yet complementary forms of private money. However, they are not interchangeable. Just as central bank digital currencies do not replace cryptocurrencies, tokenized deposits do not substitute for stablecoins in circulation.
He also highlighted the differences in issuance models: stablecoins are created within the framework of the digital bearer instruments model, while tokenized deposits are issued under the digital account model.
“This model restricts the circulation of tokenized deposits, making them more standardized and limiting their scope of use. In contrast, stablecoins offer a more versatile form of private money,” Kochergin explains.
Despite the emergence of new forms, the fundamental nature of money remains unchanged.
“They continue to operate within the established paradigm of modern fiat currency,” Dmitry Kochergin observes.
Advantages or risks?
“Tokenization arises from society’s growing demand for new properties and functions of money, while also reflecting the expanding capabilities of public and private issuers to introduce new forms of currency,” Dmitry Kochergin explains. “Technological advancements have significantly lowered costs and made these innovations more accessible.”
He notes that digital and traditional forms of money are likely to coexist for an extended period. Currently, stablecoins are mostly confined to the crypto-asset market, partly due to a lack of regulation, while the development of tokenized deposits remains in the pilot phase. Despite these limitations, Dmitry Kochergin observes that these innovations have the potential to expedite transactions and lower costs and payment fees. However, he cautions against overlooking implementation challenges, such as cybersecurity threats, potential violations of consumer rights, and the risk of facilitating illegal activities.
There are also specific challenges associated with these technologies. For tokenized deposits, these include operational risks, potential breaches of confidentiality during transactions, threats to price and financial stability, and issues stemming from the current limitations of tokenization technology. Meanwhile, the unregulated circulation of stablecoins poses risks such as diminished trust in the issuer, adverse effects on the financial well-being of holders, and even threats to monetary sovereignty and financial stability at the state level.
Picking a model
The roles of stablecoins and tokenized deposits will largely depend on the options of their integration into the monetary system, as well as ways of their interaction with central bank digital currencies (CBDC). These could involve an isolated model utilized solely within a separate bank, or a single platform model with programmed payment terms and interbank relations executed through smart contracts, created by a banking consortium and sponsored by the regulator.
The potential of tokenized deposits can be most fully unlocked jointly with CBDCs and other tokenized assets based on unified registry, Dmitry Kochergin believes.
Yet, with all its obvious advantages, such integration based on a unified registry can be very cost-demanding and difficult to implement in the medium term.
“It could lead to the risk of user privacy loss as well as a greater risk of monopolization. Therefore, implementation of various integration models requires evaluating potential benefits against the risks they could pose to those who implement such solutions,” Dmitry Kochergin summarizes.
Competing with government, cross-border payments
Models and prospects for using tokenized private money have sparked extensive debates among the participants. The issue concerns the evolution of modern monetary systems and even goes back to private vs. public finance competition, notes Mikhail Golovnin, Director of the Institute of Economics of the Russian Academy of Sciences. The said competition is non-existent in the modern monetary system, with a single currency issued by both state and private financial organizations, he adds.
Following a question posed by Valery Petrov, board member of the Russian Crypto Industry and Blockchain Association (RACIB), the participants discussed aspects of using stablecoins pegged to fiat currencies and tokenized deposits as part of cross-border settlements.
They also spoke about opportunities for receiving interest income and options for its use for both settlement and saving functions. The participants also drew attention to core differences between tokenized deposits and those supplied within a two-tier monetary system, with the corresponding issue outlined by Anton Moiseyev, Deputy Director of the Institute of Economic Forecasting of the Russian Academy of Sciences.
Tokenization: new frontiers
Artem Genkin, the report discussant, Doctor of Economics and President of ANO Center of Protection of Bank Clients and Investors, specified an array of challenges as well as aspects of private money tokenization that are not immediately apparent. As part of the open discussion, the expert and the lead speaker discussed possible options to resolve them.
Artem Genkin named prospects for tokenized deposits circulation as a pivotal aspect.
“The next step would involve making tokenized deposit a tradable asset, similar to factoring relations in traditional finance,” he noted.
According to the lead speaker, Dmitry Kochergin, such a measure will be of no benefit to traditional banks as it makes deposits vulnerable and poses extra risks.
Also, they expressed doubts as regards possible recognition of stablecoins as a monetary asset, including for the purpose of its subsequent use as a payment unit.
“I believe that in most jurisdictions across the globe such recognition is simply not feasible yet. Nevertheless, we can already see such efforts as making settlements under foreign trade contracts in stablecoins,” Artem Genkin clarifies.
“Each jurisdiction recognizes the tools it deems as advantageous. The ones that have tools that could mitigate adverse effects of circulation while providing plenty of positive aspects will resolve the issue,” Kochergin believes.
According to Artem Genkin, the prospects for taxation of tokenized deposits and stablecoins are not entirely clear, as are the mechanisms for regulating risks arising from accrual of interest on tokenized deposits, as well as the prospective role of ecosystems in the tokenization of money, not to mention the composition of issuers in the tokenized private money in the future. Difficulties may also arise when swapping between stablecoins and other monetary assets, the discussant mentioned when addressing questions to the lead speaker.
Future horizons
Speaking about private money tokenization, Artem Genkin also emphasized certain issues that have yet to be considered. For instance, it is yet not entirely clear which model of credit and monetary system integration will prove more efficient, and most importantly, more feasible. A single-bank model seems more realistic in the current conditions, the discussant believes.
“Innovative banks and other financial organizations will skim the cream, and the rest will follow to pursue best practices,” Artem Genkin says.
He also reminds that the concept of tokenization as a global equalizer, which makes an array of assets more accessible, is not about money.
“There is a chance that the things we are talking about will fail to strike a chord with private investors en masse. Money has a special path within the general process of tokenizing everything and everyone,” Artem Genkin notes.
Yet, there is still time for making adjustments, including at the regulatory and legislative level, with the tokenization of private money still being a matter of the future, the expert notes.
“Tokenization of private money is yet to become mainstream. We are basically talking about prospective things,” Artem Genkin emphasizes.