Scaling digital money depends on causes that are also effects
Interoperability between payments networks and adoption by established distribution networks are the keys to scale in digital money but their effectiveness depends on consumer confidence.
Interoperability requires infrastructure but the right combination of public initiative and private incentive has yet to be found, though it likely lies in not-for-profit utility models.
Programmable money can catalyse adoption of digital monies by enabling agentic AI payments and creating a positive feedback loop between users and additional functionality.
Regulatory divergence remains a barrier to adoption, especially in cross-border payments, which are a major use-case for digital forms of money.
What will enable digital money to generate the network effects to scale? The two most important factors, according to registrants for the 2026 Future of Finance Digital Money Event, are interoperability between blockchain networks and traditional financial markets and adoption by established distribution networks such as card issuers and money transfer agents. Two out of three registrants chose one of these options (see Chart 1).
Chart 1
While card issuers and money transfer agents are embracing Stablecoins, interoperability remains more aspiration than reality. For example, asset managers issue tokenised money market funds on to public blockchains not to reach traditional investors, but to make their funds available to crypto-native investors. They appeal to such buyers because crypto-native investors already hold other assets on-chain.
For crypto-native investors, tokenised money market funds are a bonus. They embraced Stablecoins initially faute de mieux. It is why the value of Stablecoins grew from US$25 billion in 2021 to more than US$300 billion in 2026, without issuers having to entice them by sharing the yield on the reserves. Stablecoins were the only fiat currency payment instrument available on-chain. Tokenised money market funds enable them to look beyond transferring value to earning yield. Funds eliminate an invidious choice between holding non-yielding Stablecoins and paying the transaction costs to come off-chain to hold cash in a yield-bearing deposit account or a traditional money market fund.
But tokenising a fund for the convenience of on-chain investors is scarcely a step towards interoperability between Decentralised Finance (DeFi) and Traditional Finance (TradFi). The investors, the instruments and the networks in DeFi and TradFi remain separate from each other. Creating genuine interoperability between tokenised and traditional assets requires investment in the infrastructure that would enable crypto-native and traditional investors to be indifferent as to whether an investment is tokenised or not. A crucial question is whether the private sector has the incentives to build the open market infrastructure to make that indifference possible, or whether the investment requires a public initiative.
Openness is not yet a priority for traditional financial institutions. Asset managers tokenise existing funds, not native funds – tokenised funds are almost all digital twins. Likewise, banks have built tokenisation platforms but these remain proprietary. Wider, open multi-bank projects, most with some form of official encouragement, are developing, but slowly. They need the support of banks. And banks are reluctant to invest to change the status quo. They do not want to replace legacy banking systems built decades ago, partly because of the cost but mainly because of the risks, not just of outright failure but of empowering new entrants.
Incumbent banks are right to be worried. Prudential treatment of cryptoasset exposures, the capital weightings framework for digital assets first published by the Basel Committee on Banking Supervision (BCBS) in December 2022, introduced capital allocations that have discouraged regulated banks from experimentation with digital monies. When capital costs are combined with onerous financial crime compliance, banks do not have to work hard to find reasons not to invest in issuing digital money.
New entrants are less inhibited by capital concerns and financial crime compliance, though they apply. Without legacy systems, and with the advantage of the latest technologies, they have a competitive advantage. Banks are looking to blunt it by forming consortiums to build compliant Stablecoin platforms from scratch rather than trying to adapt legacy systems to Stablecoins. This is a path familiar to banks: building digital capabilities in the Cloud is easier than trying to retrofit legacy systems to new demands. Consortium-based strategies also proceed on the basis that the members form a natural distribution network for digital monies. Banks are also hoping the costs of investment can be limited by sharing the costs of construction.
After all, within banks there is always tension between technology teams pursuing budgets to fund pet projects, so digital money infrastructure is never more than one proposition among several. Every business unit in every bank is also wary of costly investments that promise efficiencies in the future only. The requisite return on investment (RoI) is hard to achieve in a nascent market. The investment costs are intrinsically hard to predict too. The European Central Bank (ECB), for example, estimated its own digital currency infrastructure would cost roughly €6 billion to build. An estimate by an independent accounting firm was three times higher, at €18 billion.
Experience of central banks building payments systems can be discouraging. The TARGET2-Securities (T2S) settlement platform built by an ECB exasperated by private sector procrastination has never recouped its costs or delivered the promised efficiencies. Banks have also learned from previous projects that public initiatives impose investment costs on them, to accommodate the new services.
Market participants also fret about ceding control of digital payments infrastructure to a central bank. This is hard to understand, given that banks have long since come to rely on the Real Time Gross Settlement (RTGS) systems operated by central banks as the ultimate settlement destination. But they are even more uncomfortable about the prospect of a private actor building a (possibly natural) monopoly they will not wish to use because it benefits a competitor. Collectively controlled, not-for-profit utility models that operate to the highest common regulatory factor - such as Pay.UK, operator of the Faster Payments scheme in the UK, which is controlled by 38 guarantor banks and regulated by the Bank of England - are the obvious way forward.
The Bank of England has no plans to impose change. Its National Payments Vision aims to deliver an “eco-system” rather than an infrastructural monopoly of either the public or the private kind. Its view is that the next-generation retail payments infrastructure must be built collaboratively between the public and private sectors via an industry-owned company directed by a Retail Payments Infrastructure Board. Change is not imminent: the Board is scheduled to meet for the first time in October 2026.
Though the eventual outcome is therefore indistinct, it is clear Pay.UK will continue to run inter-bank payments systems while the central banks will continue to provide settlement in central bank money. All forms of digital money – not just Stablecoins and tokenised deposits but any sterling Central Bank Digital Currency (CBDC) that is issued and traditional fiat currency – will be supported by the future infrastructure. This is a vision of interoperability by design, enabling multiple monies to interoperate easily on a common infrastructure.
The ability of that common infrastructure to enable the issuance of programmable money will be a key test of its utility. It would enable artificial intelligence (AI) to be introduced to payments, allowing money to transfer without human intervention, increasing the usefulness of digital money. Provided open standards were agreed, AI would open payments to a wider range of service providers as well, though so-called “agentic” AI payments raise serious concerns about accuracy and privacy.
However, programmability is rich in potential to catalyse scale in digital money. It could help to drive scale by creating a self-reinforcing feedback loop between developers and users. The more applications built into or made available to a given monetary token, the wider the range of potential users of it. As more users exploit its capabilities, more developers will apply their talent to adding further functionality.
Regulatory clarity might create a similar positive feedback mechanism, by making it easier for developers to design compliant forms of programmable money for use in multiple jurisdictions as well as in multiple situations. Which is why the Bank of England has been careful, in its National Payments Vision, to emphasise that any new retail payments infrastructure must be based on a predictable regulatory framework.
However, getting regulation right in one jurisdiction is a lot easier than making sure that regulatory regimes in different jurisdictions do not erect barriers to interoperability between digital monies. Regulatory divergence is already a major barrier to scale in cross-border payments – precisely the area where the need for faster, cheaper, more transparent and more accessible payment services is greatest.
Even Stablecoins, for which cross-border payments are a major use-case, cannot entirely overcome this regulatory divergence. For example, a Stablecoin fully licensed in one jurisdiction cannot legally be transferred into a neighbouring jurisdiction without an equivalent regulatory framework. This complex regulatory patchwork, increasingly visible globally, makes the regulatory treatment of cross-border payments services too unpredictable for entrepreneurs to build a durable business.
But even regulatory convergence is no substitute for consumers confident that they can use digital money to pay and get paid, domestically as well as across borders. Consumers need to be confident that the technology works and trust the issuers as well as believe that regulation can protect them from loss. Interoperability and distribution networks may well be the keys to scale in digital money, but a puzzling conundrum remains. They will build on, rather than initiate that confidence and trust.
