How We Will Pay Tomorrow Is Being Decided Today

Private token money already plays a certain role today as an investment and speculative object, besides a means of exchange for a narrow circle of users. However, it does not serve as a widely used payment means. It is in this role that it could create great added value in an increasingly digital world. The business community is clamoring for programmable, blockchain-based currencies for payments. Not surprisingly, most central banks are exploring digital forms of central bank money (central bank digital currency, CBDC). At the same time, private issuers of stablecoins are increasingly taking steps to ensure that their payment means can be more widely accepted and used.

It is not citizens who want better payment means or metaverse marketplaces with lofty visions of the future that are driving the development of modern payment means. Rather, it is the traditional economy with its everyday challenges that needs innovation. On the one hand, it is about increasing efficiency; on the other, it is about opening up new business models. On the government side, the focus is on securing sovereignty in the competition between currency areas.

Parallels to the traditional world can be found not only in the innovation drivers, but also in the various forms of token money. These are as diverse as today's range of payment methods. The tokenized counterparts to cash, deposits and private currencies are retail CBDC (rCBDC), tokenized deposits, and stablecoins. With book money, commercial banks have long provided their customers with an instrument for money and thus value creation. This is now set to open up new business opportunities on an innovative technological basis.

It is still unclear today which digital payment means will prevail for the general public in the future. This depends not only on the added value they offer for the intended use cases or on the specific situation of a country or currency area; it is also influenced by the risks associated with the introduction of token money as a payment means. Considerations of stability and resilience are paramount. The use of token money must not jeopardize the high stability of the current financial system. It is also crucial to ensure its stable value if it is to be widely used as a payment means. The failure of Facebook’s Libra stablecoin project has made it clear that there must be high regulatory requirements for freely accessible digital payment means. Few countries are as far along in forming political opinion on the subject of token money as Switzerland. Here, the Federal Council and the Swiss National Bank (SNB) signaled their opposition to an rCBDC at an early stage.

Stablecoin providers face two major challenges. On the one hand, they must be able to operate profitably within a tight regulatory corset. On the other hand, they must guarantee stability even in difficult market situations. Otherwise, confidence will erode. An example of this is the temporary collapse of the USDC stablecoin against the dollar. This was triggered by the collapse of Silicon Valley Bank, where billions of USDC reserves were deposited.

This and other examples reinforce the public's skepticism towards stablecoins and indicate that, as in other economic sectors, only a small proportion of projects are likely to be successful. Even the release of a functioning monetary token is no guarantee that it will be widely used. The economist Hyman Minsky aptly stated a long time ago: “Anyone can create money; the problem is getting it accepted.”

It is therefore uncertain what the global payments landscape will look like in ten years’ time. We are likely to see a coexistence of different forms of money, each with its specific advantages for particular use cases. Moody’s Investors Service takes a look into the future and predicts that tokenized bank deposits and CBDCs are better positioned than stable­coins to become a widely used payment means.

The specific design of token money should not only be derived from the added value it offers to potential use cases. It also has implications for the integrity and stability of money and payments, the market structure, and customer protection. Therefore, the introduction of token money for the general public affects society as a whole. Agustín Carstens of the Bank for International Settlements therefore calls for central banks to work together with other public institutions and private stakeholders. Together, they should realize the vision of a socially oriented payment system.

Not surprisingly, political and social objectives are at the forefront of the rCBDC projects, which are driven solely by public authorities. The digital euro, which could be introduced as early as the end of 2025 after a two-year preparatory phase, is about Europe's strategic autonomy in payment transactions. It is also about reducing dependence on expensive foreign credit card providers and maintaining the power to shape monetary policy in the event of a further decline in cash in circulation. In contrast, CBDC regimes already operating in developing countries such as Nigeria aim to provide access to the financial system for the general population. They also aim to bridge the occasional shortage of physical banknotes.

With its successful economic and financial center, its world-leading technical universities, and its high level of innovation, Switzerland is also striving to position itself strategically in a digitalized real economy. To achieve this, it needs a futureproof payment infrastructure. TWINT is a success story today and the instant payment system is about to be launched on the market. There is also already talk of a tokenized Swiss franc. Such a public good is of central importance for the competitiveness of the Swiss financial sector and its strategic positioning in an increasingly digital economy.

Inaction is not an option. The lack of a programmable franc for the general public poses major risks in the global competition between locations. Without it, the digitalization of the economy could progress more slowly and interoperability with digital markets abroad would become a challenge. Adapting traditional systems to meet the high demands of the global digital economy would be very costly. One possible consequence could be the use of foreign token money. The associated risks for the financial system, Switzerland's attractiveness as a business location and its sovereignty cannot yet be fully assessed. Even if there are still many unanswered questions and uncertainties surrounding token money, the conclusion that the status quo is the least risky option seems premature and short-sighted.

Since last summer, the banks in Switzerland have been working together to explore the possibilities of a digital franc. This is intended to be a transformative step for the future of banking in Switzerland. Under the coordination of the Swiss Bankers Association (SBA), a group of banks has launched a project to introduce a digital franc based on tokenized book money. This should have the character of a public good and lay a solid foundation for new and innovative services in Switzerland.

This token money could prove to be an important innovative step in the processing of financial transactions. It promises high efficiency gains, especially for complex payment transactions. In addition, the delivery versus payment (DvP) principle enables simultaneous processing. This largely eliminates settlement and counterparty risks.

Private token money and real digital central bank money (the SNB’s wholesale CBDC) already exist in Switzerland today – at least in pilot operation. This allows banks to settle digital bonds on the SIX Digital Exchange platform. The main difference between the existing token money and the SBA’s project is availability to the general public and the usability for any number of use cases.

One day, the potential use cases for the tokenized franc should extend beyond purely financial applications into the real economy. The DvP functionality combined with the possibility of very small denominations, for instance, opens up the field for so-called nano-payments. These are of great importance for pay-per-use business models. Transactions in a CHF-DLT financial ecosystem and machine-executed transactions also require seamless integration of payment instruments.

The SBA’s work to date has shown that the technical challenges of token money are generally manageable. However, the ability to create a robust legal and economic framework is critical to success. This must enable every participating bank to tokenize book money while complying with all relevant regulatory requirements. The next step is to conduct a feasibility study. This will require close cooperation between the authorities and the financial sector, in line with Carstens’s vision. Only in this way will the Swiss economy have an innovative payment means that, like conventional money, guarantees the necessary reliability and enjoys sufficiently broad legitimacy.