Now that we have looked at the origins and functions of money and the current monetary system, it is essential to gain a deeper understanding of both traditional and emerging forms of digital money. In this chapter, we dive deeper into the various representation mechanisms that exist today, and we highlight both the similarities and the differences between the various forms of digital money. By the end of this chapter, you will have a solid overview of the most prevalent forms of digital money and hopefully a clear understanding of their current use cases.

Digital money instruments

* not yet available ** defined as ‘formally integrated into the ’ (learn more)

• CBDC is a type of issued by the central bank as a direct liability of the State. This means that, similar to cash or bank reserves, it has no counterparty nor credit risk. By extension, CBDC is formally part of the , which means that the law ensures convertibility at with all other forms of money within the regulatory perimeter (i.e. cash, bank reserves, bank deposits and e-money). 

• CBDC is an emerging digital money instrument that may be enabled by shared ledgers that, dependent on the underlying design, offer greater functionality than established electronic forms. 

• There are two main CBDC arrangements: CBDC is available to the general public (like cash); whereas participation in CBDC models is restricted to select financial institutions (e.g. bank reserves). 

• Depending on the design, CBDC may be received, stored and transferred via digital wallets (e.g. mobile applications) or physical devices (e.g. cards or USB sticks that provide offline functionality). The distribution and management of these consumer-facing applications is generally outsourced to authorised private agents such as payment companies or commercial banks.

• Bank reserves are a special type of that is issued by the central bank and used primarily for the purpose of facilitating inter-bank transactions via the national wholesale settlement system (), typically a real-time gross settlement (RTGS) system. As a result, access and usage is restricted to select financial institutions (mainly commercial banks) that have a reserve account at the central bank.

• Bank reserves are a foundational component of the and used by, among others, the central bank as a key tool for implementing monetary policy.

• Bank reserves are an established digital money instrument issued in the form of electronic records (deposit accounts) in a private electronic ledger system that is operated and maintained by the central bank.

• Bank deposits are a type of issued by commercial banks in the form of a bank account balance held in the customer’s name. Generally available to both households and businesses, bank deposits are the most used form of money in developed economies today. Commercial bank money is generally created through the process of lending to consumers and businesses: conversely, bank money is destroyed (removed from circulation) when a loan is repaid or a borrower defaults. 

• Bank deposits are formally included in the , which means that the law ensures convertibility at with all other forms of money within the regulatory perimeter (i.e. cash, bank deposits issued by other commercial banks and e-money). Individual account balances benefit from State-guaranteed deposit insurance up to a specific threshold, which varies between jurisdictions. In exchange for this privilege, banks are subject to extensive banking regulations as well as stringent capital and liquidity requirements.

• Bank deposits are an established digital money instrument issued in the form of electronic records that are individually managed by each commercial bank using their own, private electronic ledger system. These disparate systems are periodically reconciled through institutional procedures involving specific messaging standards and settlement systems. As a result, bank deposits remain functionally limited within the boundaries of each individual bank’s information system.

• Bank deposits can be accessed and used via online web banking applications, through customer service at local branches or via the writing of physical cheques which can be drawn against the account balance (though in declining use with growing digitalisation).

• Tokenised bank deposits are the digital equivalent of a traditional commercial bank deposit. From a legal perspective, they are essentially the same instrument ( issued by commercial banks as monetary payable on demand) in a different form (i.e. under a new ).

• By extension, tokenised bank deposits may be considered a formal part of the . The same protections and limitations of traditional bank deposits should in theory apply.  

• Tokenised bank deposits are an emerging digital money instrument typically issued by means of shared ledgers, a new that endows them with greater functionality than traditional bank money issued via conventional electronic ledgers (the extent of which depends, among others, on the design and openness of the underlying system). Tokenised bank deposits can operate ‘24x7’ and are not restricted to bank opening hours. They can also support programmability and reduce the cost of payments.

• Tokenised bank deposits may be integrated into conventional online web banking applications or accessed and used via dedicated digital wallets (their functionality dependent on individual banks).

• Electronic money (e-money) is a type of issued by licensed institutions in the form of an account balance held in the customer’s name. E-money has emerged in response to the growing need for fast electronic payments for e-commerce transactions, though it is also increasingly used as a means to store savings over longer periods.

• In most jurisdictions, e-money is formally part of the , which means that the law ensures convertibility at par value with all other forms of retail money within the regulatory perimeter (i.e. cash and bank deposits). Issuers are subject to stringent rules about permissible investments and other requirements: while these tend to differ between jurisdictions (both internationally and nationally), e-money generally has to be fully backed by safe, highly liquid money market instruments.

• E-money is an established digital money instrument issued in the form of electronic records managed within each issuer’s proprietary information system. E-money may appear to have greater functionality thanks to sophisticated front ends and integrated plug-ins from third-party financial technology (fintech) companies. However, ultimately, it is constrained by the boundaries of the issuer’s information system as well as the limitations of the conventional banking rails (infrastructure) on which it remains dependent for ultimate . 

• E-money can generally be accessed and used via online applications offered by the electronic money institution, though it may also be available through third-party fintech extensions and plug-ins.

• Stablecoins are digital assets that purport to maintain a stable value against another asset or basket of assets, typically a fiat currency. They are a form of and the purported stability in value sets them apart from other cryptoassets.

• The term ‘stablecoins’ is colloquially used to describe a range of instruments with different issuers and characteristics. It is possible to distinguish three categories: fiat-backed stablecoins, which are issued as monetary  of financial institutions (mostly non-banks), crypto-collateralised and algorithmic stablecoins, which have no formal issuer. 

• Most stablecoins remain outside the , which means that they are not convertible to other forms of money. Stability in value is entirely dependent on the mechanism design of each arrangement. Fiat-backed stablecoins attempt to maintain a stable value by managing a reserve portfolio of , , etc. Crypto-collateralised stablecoins attempt to maintain stability by issuing new units against eligible digital assets at specific penalty rates (over-collateralisation) reflecting individual volatility risk. Algorithmic stablecoins attempt to maintain stability by dynamically adjusting the supply through the issuance of seigniorage shares. Users should be aware of the risks inherent in each category, as well as the individual risk profile of each arrangement within these categories.

• Similar to other cryptoassets, stablecoins are emerging digital instruments issued in the form of transferable digital tokens on shared ledgers that are generally open and permissionless. As a result of their pegged exchange rate to national currencies (theoretically eliminating price volatility), global availability to retail users and attractive functionality thanks to native interoperability with applications on the same shared ledger rails (programmability), they have significantly grown in popularity in recent years.

• Stablecoins can be accessed through digital wallets that range from open-source applications independently managed by the user (unhosted/self-custodial) to dedicated accounts administered by third-party service providers (hosted/custodial).

• Cryptoassets are seen by some as a form of (e.g. in the opening text of the Bitcoin white paper), but arguably they do not easily meet the three functions of money defined earlier. For those that do see them as , they are a special type of insofar as they have no formal issuer and are each denominated in a unique unit of account that bears no relationship to existing national currencies. As that are no one’s , they may be considered a synthetic form of , even though their monetary usage remains largely secondary to the speculative use (partly due to their volatile nature which discourages a firmer establishment as a generally accepted payment instrument in an economy where prices are denominated in terms of the national currency).  

• Cryptoassets are categorically outside the . The value of cryptoassets expressed in terms of national currencies (exchange rate, often simply referred to as ‘price’) is volatile and subject to significant price swings. Users do not benefit from any protections and are at major risk of losing their funds to sudden falls in price, cybersecurity incidents, and/or negligence (with no recourse possible). 

• Cryptoassets are emerging digital money instruments issued in the form of transferable digital on that are open and permissionless. They have pioneered shared ledgers as a new representation mechanism for (including money) thanks to their intricate use of blockchain and distributed ledger technologies for decentralised recordkeeping. 

• Cryptoassets can be accessed through various means that range from direct interaction with the underlying network to a dedicated node to digital wallet applications that may be independently managed by the user (unhosted/self-custodial) or by a third-party service provider (hosted/custodial).