In previous chapters, we learned that essentially serves as a social system for recording and underlying and debit relationships. Put simply, it’s a way to keep track of who owes what to whom. Now, how can we represent these relationships?

In theory, any asset can serve this purpose. However, in practice, different issuers introduce different forms of employing different technologies to meet specific needs and cater to different user groups. This process is dynamic and often involves a significant role for the State, though not necessarily. The evolution of is influenced by cultural, social, economic and technological factors, among others.

It is important to understand that the essentially operates as an accounting tool. Its primary function is to record and monitor social obligations, which encompass and debit relationships. The historical evolution of ranges from traditional forms (e.g. silver coins) to modern innovations (e.g. e-money). Despite their physical appearance at times, they remain fundamentally symbolic tools.

Previously, we learned that ultimately it does not matter what material a is made of as it is merely a symbol. However, it is of crucial importance to have accurate mapping, and subsequent , of the underlying relationships in every of . Overall, fall into two broad categories: -based and account-based (double-entry bookkeeping).

Token-based mechanisms

For centuries, physical have served as physical representations of various monetary systems. These tangible forms of include commodities, coinage and paper . Transactions involving physical allow for peer-to-peer (P2P) exchange and, therefore, instant . However, exchanging physical tokens requires physical proximity and may involve storage costs. Another disadvantage of physical is that they do not maintain a transaction history.

Account-based (double-entry bookkeeping) mechanisms

Double-entry bookkeeping is an accounting method that involves maintaining paper or electronic ledgers to record and , representing various obligations. This often takes one of two forms:

• Paper or electronic ledgers: Transactions recorded through double-entry bookkeeping are typically cleared through institutional processes with deferred .

• : The technology of these ledgers eliminates the need for intermediaries and offers the possibility of instant and self-custody. also provide additional functionality through ecosystem interoperability, allowing different systems to work together seamlessly.

The evolution of technology has significantly impacted the way accounting is conducted. Technology has enabled the evolution of and has allowed for the emergence of new forms of (e.g. e-money in the 1970s) as well as increasing the flexibility of the institutions that issue them. 

From commodities to coinage to paper ledgers (double-entry bookkeeping) to bills/notes to electronic ledgers to digital , each iteration aimed to address the limitations of the previous one, but it also introduced its own set of challenges:

• Challenges of proximity, storage and carrying costs for physical forms

• Challenges of institutional reconciliation and processes for ledger-based forms.

Digital is prevalent today. Thanks to the rise of electronic recordkeeping in the 1960s, digital is widely available in the form of e-money, commercial bank and central bank reserves. This development has gone hand in hand with the emergence of new institutions such as electronic money institutions (EMIs) and payment service providers (PSPs). 

However, the functionality of digital remains constrained due to inherited technological limitations from the 1960s and 70s. The prevalent client-server model, based on isolated proprietary databases, has limitations in representing electronic . 

This current model requires extensive interorganisational reconciliation efforts to keep databases and ledgers in sync. As a result, a multi-tiered, concentrated market structure has developed over time, which, despite recent improvements, remains often slow and often expensive, and, above all, is restricted functionally from interacting more seamlessly with third-party applications and other .

It is against this backdrop that , including distributed ledger technology (DLT), are being explored as potentially superior computational substrates for the future of and financial services.

The concept of ‘’ represents a revolutionary shift in accounting systems. It facilitates the digitisation of , especially , in a way that breaks free from traditional informational silos. This unleashes a multitude of new functionalities and opportunities. While ‘blockchain’ and ‘DLT’ are the most recognisable examples of , it’s essential to emphasise that decentralisation is not obligatory.

, often facilitated by DLT, introduce a modernised recordkeeping mechanism. They empower dynamic digital with enhanced functionalities. These are network-based digital infrastructures, operated collaboratively by multiple parties. They combine two previously distinct processes: messaging and . establish a single source of truth accessible to all involved parties. This means records of ownership and transfers can be efficiently managed within the same ledger.

This innovative approach enables the creation of ‘digital ’, including the generation of new forms of . These digital possess unique characteristics: they are portable, interoperable, expressive, and more. Currently, DLT stands out as the leading technology for implementing . This prominence is largely attributed to the pioneering role of cryptoassets and their public, permissionless blockchains.