Financial institutions are on the hunt for the closest substitute for physical currency. Something that preserves the positive attributes of cash without the inconvenience of walking around with money stuffed in our pockets.
Cash is a near‑perfect settlement asset. When one pays with cash, the transaction settles in real time and enables the recipient to use the money immediately. The recipient has no exposure to credit risk.
At the same time, cash is inconvenient for large transactions. It can be lost, stolen, or accidentally washed with pants. Sender and receiver must be in the same physical space. It does not grow while sitting in our pockets and, above all, the anonymity of the transaction makes it a favorite payment method for terrorists and criminals.
So what makes an asset desirable for transaction settlement? What is “perfect” money? Some desirable features include: universal acceptability, minimal credit risk, stable value with the potential to generate yield, and traceability.
For over a century, we have left money in bank accounts and used credit cards, debit cards, checks, wire transfers, and ACH payments to deposit or spend. This paradigm has created a new set of problems. Money is not always available to the recipient immediately. It can take days, especially in cross‑border transactions. Because settlement may not occur instantly, this system can expose participants to the credit risk of the depositor and the depositor’s bank.
Finally, there is innovation in this space. With many capital‑markets activities moving on chain, there is now more than ever a thirst for a perfect settlement asset. A new set of alternatives has emerged, thanks to blockchain technology. Each one gets us closer to the favorable attributes of physical currency, but none is a perfect “digitized dollar.”
Stablecoins – Some argue that Tether and USDC tokens are the closest thing to a digitized dollar. The GENIUS Act gives legitimacy to stablecoins through limitations on who can issue them (banks) and what they can do with the backing assets (mostly buy T-bills). That reduces, but does not eliminate, credit risk. It also prohibits the issuer from paying interest, a key benefit of leaving money in the bank.
Tokenized deposits – These are our deposits sitting in a commercial bank, wrapped in token form. They can live on a blockchain and be transacted between wallets on the same chain. Just like legacy deposits, these tokens can earn interest, and like stablecoins, payments with these tokens are instant. However, they fail the “universal acceptability” test: both sender and receiver need to have an account with the same bank, which limits their appeal.
Tokenized money market funds – Roughly $6 trillion is invested in U.S. money market funds (MMFs). Investment in MMFs produces yield. Credit risk is minimal, as most can only invest in high‑quality liquid assets like T‑bills. A few asset managers, such as BlackRock and Franklin Templeton, have tokenized these funds. Some in the crypto world now use tokenized MMFs to transact instead of stablecoins. It helps that these tokens are more universally acceptable. For example, Franklin’s BENJI tokenized MMF is available to all retail investors.
A perfect replacement for cash would be a central bank digital currency (CBDC). but the current administration has little interest in pursuing it. As stated in the executive order the president signed last year:
“(v) taking measures to protect Americans from the risks of Central Bank Digital Currencies (CBDCs), which threaten the stability of the financial system, individual privacy, and the sovereignty of the United States, including by prohibiting the establishment, issuance, circulation, and use of a CBDC within the jurisdiction of the United States.”
In the absence of a CBDC, tokenized MMFs hold promise. They are low credit risk, hold their value while generating yield, are traceable, and are structurally close to being universally acceptable. Alternatively, financial institutions could create an infrastructure, like Zelle, to facilitate the transfer of tokenized deposits between member banks.
Have no doubt, a bank or a fintech is already working on this. BNY just announced it is tokenizing deposits of its clients.
2026 is promising to be an interesting year.