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Ep 56: Tokenized Economies and the Architecture of Digital Money
99 Plays22 days ago
Keith Bear, Fellow at Cambridge Judge Business School, joins us to break down what digital money really looks like in a tokenized economy. From stablecoins to CBDCs, we explore what’s working, what’s missing, and what still needs to be reimagined.
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Transcript
Introduction to 'Owl Explains Hootenanny'
00:00:06
Speaker
Hello and welcome to this Owl Explains Hootenanny, our podcast series where you can wise up on blockchain and Web3 as we talk to the people seeking to build a better internet.
00:00:17
Speaker
Owl Explains is powered by Avalabs, a blockchain software company and participant in the Avalanche ecosystem. My name is Silvia Sanchez, project manager of Owl Explains, and with that, I'll hand it over to today's amazing speakers.
Role of Digital Money in Web3
00:00:34
Speaker
All right, hi everybody and welcome to another episode where we talk about what's real in Web3 and why it matters. Today we're discussing digital money, not just as a concept, but as critical infrastructure.
00:00:47
Speaker
What does money look like when assets, contracts and ownership all live on chain? Today we have a very special guest. We have Keith Baer, fellow at Cambridge Judge Business School and a global voice on financial infrastructure and tokenized markets.
Discussion on Stable Coins and CBDCs
00:01:02
Speaker
We'll talk about stable coins, CBDCs, and what it takes to build a digital economies that aren't just fast, but that are functional, fair, and future-proof. So, hi, Keith. Thank you for joining us.
00:01:13
Speaker
Hi, and thank you for inviting me. So I wanted to kick it off saying that we've had digital representations of value for decades, from online banking to mobile wallets. But in the context of tokenized economies, what does digital money actually mean today?
00:01:30
Speaker
Is it a design feature, a policy imperative, or is it something deeper about how we trust systems? I think it's essentially around having a different form for the different types of money that we know and largely trust today.
00:01:44
Speaker
um So as you know, definition of money is usually taken to be having a unit of account, a medium of the exchange and a store of value. And we have different forms of money that comply to that largely. So ah central bank money, which is you know in two forms, physical cash,
00:01:59
Speaker
and the reserves held at the central bank. And then we have commercial bank money, which is the the largest element, which is represented in commercial bank accounts, et cetera. And then we have e-money. And the digital forms of those essentially come out in the central bank money case as CBDCs, be it retail or wholesale.
00:02:16
Speaker
In the case of commercial bank money, typically in tokenized deposits, or more recently in deposit tokens. And then in the kind of broad category of e-money, we have stablecoins.
On-Chain Cash and Tokenized Assets
00:02:28
Speaker
ah where there's ah obviously an issuer and usually fully backed reserves to maintain stablecoins at par. So in many respects, they're just a but digital form of the same types of money that we're used to in the common context.
00:02:42
Speaker
That's a great way to explain it. And i think that we have seen that a lot of attention in Web3 goes to tokenizing the assets. We have things like real estate, event tickets and intellectual property.
00:02:53
Speaker
But what about the money that is used to buy or sell so those things? Do you think that we are at a risk of building high speed digital asset markets that will still settle with outdated payment systems?
00:03:05
Speaker
ah Very much so. And I think this is a very hot debate in financial markets at the moment. So as you say, tokenization is really accelerating at the moment. and So I think that last year there was something like $1.3 billion dollars worth of tokenized bonds that were issued locally.
00:03:21
Speaker
And there have been some pretty impressive um estimates as to what the total tokenized asset market could look like. you know, BCG estimating it to be up to $16 trillion dollars in terms of ah liquid assets, the counts that you were mentioning, by 2030. And there have been a range of other ah somewhat smaller, but still in the trillions of dollars estimates as to what that number could be.
00:03:41
Speaker
and So as that tokenization accelerates, as you say, in order to have ah the benefits of atomic settlement, getting rid of counterparty risk, it does require to have the cash on chain as well.
00:03:53
Speaker
And there are only a finite number of ways that can be delivered. Obviously, in the case of central banks, they much prefer that settlement asset to be central bank money.
Challenges with Wholesale CBDCs and Stablecoins
00:04:02
Speaker
um And that kind of leads us to a wholesale CBDC as an option, which is still very much in its infancy.
00:04:08
Speaker
And because of the way that the market is moving towards tokenized assets at the moment, ah the only other a choice, which is you know becoming more relevant, is using stable coins as a settlement asset.
00:04:19
Speaker
Obviously, from the central bank's point of view, that represents having a more significant risk as they perceive it as a less safe version of money than central bank money for obvious reasons.
00:04:30
Speaker
And it does lead to some significant challenges. In fact, we published a research report end of last year on wholesale CBDC and we interviewed around a dozen so banks and a dozen or so central banks on their perspectives on this. And from those interviews, it was very clear there was ah what we called an innovation gap ah between the industry participants that were accelerating this move to tokenized assets and the central banks that you know recognized the change, but were of somewhat slower in terms of addressing exactly how to provide that cash leg most effectively.
00:05:04
Speaker
And really that was, sort of as I said, the end of last year. But this year in 2025, things have moved on a little bit. The ECB have now announced what their plans are going to be for wholesale CBDC. So that's the Pontus and the Appia initiatives that they've announced. And the Bank of England here in the UK has also announced a DLT challenge to understand how wholesale CBDC could be ah made available on a third party operated ledger.
00:05:29
Speaker
So it's a very dynamic area to answer your question.
Trust and Stability in Digital Money Forms
00:05:33
Speaker
and there's Certainly a very strong requirement for tokenized cash to support settlement of tokenized assets. And I think the central banks are moving, albeit many would hope they would accelerate the pace a little bit.
00:05:45
Speaker
Right, and that's a very important item of it, now the the adoption and at the speed at which it's moving. um And I think that right now those are the two biggest players in digital money right now. We have stablecoins, CBDCs, and it's evident that they're both trying to become that go-to format for how we move value on this digital world.
00:06:04
Speaker
But it's true that they come with very different design choices, trade-offs. So I wanted to ask you what stands out to you and how they both approach trust, control, stability. And do you think that models like USDC or China's digital yuan tell us anything about where this is all headed?
00:06:22
Speaker
Indeed. So central bank digital currency is you know seen by central banks really as another form of the bedrock of the two-tier system, the central bank money system and the commercial bank money systems.
00:06:37
Speaker
um And stablecoins, as I touched on before, are not necessarily seen as trustworthy in the sense that it depends, there's obviously a dependence on the issuer.
00:06:49
Speaker
And we've seen examples of stablecoins de-pegging, notably with the failure of ah Silicon Valley Bank and Symmature Bank, also during the times of Tarabuna, et cetera.
00:07:00
Speaker
and So there are marked events that can cause de-pegging and obviously from a central bank point of view, the risk of a run on the stablecoin issuer. um And and in that context, the you know the lender of last resort is obviously the central bank at the end of the day.
00:07:15
Speaker
So in that respect, and you know from an economic point of view or from a central bank's point of view, that they will always be the most trustworthy form of money.
Stablecoins as Financial Instruments
00:07:24
Speaker
But obviously that depends on playing that trustworthiness against the other kind of design philosophies, if you like, in terms of usability, adoption and so on.
00:07:36
Speaker
and So stability is a question that stablecoins have to cope with because of the nature of the model, their ability to but provide funds back to stablecoin owners when when requested in that respect on a timely basis. And when there's a ah market rush or market issue, as examples I mentioned, that's when it gets more difficult and challenging in order to be able to provide those redemptions on a timely basis.
00:08:04
Speaker
ah So, you know, trust, stability and control are all key factors. ah But the models between CBDC and stablecoins are very different in terms of how they deliver on that and with different kind of profiles as far as those factors are concerned.
00:08:18
Speaker
Right. and And I think it's also safe to say that stablecoins can often be framed as financial instruments, but are they actually infrastructure? Because if Visa's rails are private but regulated, do you think that stablecoins can follow that path or is the regulatory lens too focused on product and not function?
00:08:38
Speaker
I mean, I would say that stablecoins would be normally seen, at least in my point of view, as financial instruments. And when we talk about infrastructure, we're probably talking more about the underlying blockchains that they run on in that respect.
00:08:51
Speaker
um Stablecoins, you may know Tony McLaughlin. He was a managing director at Citibank and more recently is now the CEO of Ubix, who are focused on building a stablecoin clearing platform.
00:09:05
Speaker
ah His oft-quoted description of stablecoins is that very much they're a digital equivalent to traveller's checks. It's a non-bank issue, if they're redeemable, a par, they're a bearer instrument, etc.
00:09:17
Speaker
And that there shouldn't be a confrontation which happens, especially with the regulatory community, ah conflating them with their crypto assets in that sense. So I think there is an argument that they should be seen as financial instruments in the purer sense.
00:09:32
Speaker
rather than an extension of the crypto asset system. And you know we should be thinking of the infrastructure in terms of the, in the case of blockchain, the infrastructure that supports the stablecoins in terms of their ah travel and their settlement, etc.
00:09:47
Speaker
Of course, it's all about having a ah good infrastructure that's able to to support that and that's able to scale to that. Ask yourself, what's a wallet for? Bank cards, train tickets, spare change, maybe even a picture of your cat Fluffy.
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00:10:01
Speaker
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00:10:12
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00:10:38
Speaker
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00:10:49
Speaker
Download Core today. And now coming back to the point of CBDCs, I think that they sound great in white papers, but in the wild, they can raise hard questions about the topics of privacy or programmability.
Privacy and Programmability in CBDCs
00:11:03
Speaker
So what do you see as the most overlooked trade-offs in central bank design thinking? ah For retail CBDC, you mean? Yeah, whether whether it's retail or in general, like we have this and sort of this skepticism or there's obviously this this pain point of privacy, programmability.
00:11:21
Speaker
But so what do you think that that that can raise moving forward? Sure. ah So for retail CBTC, you know, As I said before, in a sense, they're just a digital form of physical cash in one sense, ah you know another form of central bank money issued by the central bank.
00:11:40
Speaker
However, they're not necessarily cash-like. Most of the implementations that you know we've seen in practice in Bahamas, Jamaica, Nigeria, and the planet in China, um essentially ah they have limitations ah in terms of the full ah privacy perspective with cash physical cash.
00:11:59
Speaker
um So, that that is a ah key issue and you know surveys that have been done in various countries that have been considering CBDCs frequently flag privacy as being the most ah biggest issue and biggest concern ah that consumers have in terms of having access to a CBDC.
00:12:19
Speaker
You know, we've had graffiti in the UK. We've had the US obviously banning CBDCs because of privacy and surveillance concerns. and So regardless of whether the central bank, as in the case of the UK, has stated that if there is a CBDC, and the central bank will have no access to any of the personal information.
00:12:38
Speaker
and that doesn't necessarily get over the trust barrier with consumers in terms of understanding ah the likelihood of their personal data being available to central authorities in that respect.
00:12:49
Speaker
and So it is a huge social issue in that respect, as well as ah an implementation issue. And clearly one of the concerns, I think, in terms of how broadly accepted CBDCs may be, because with the countries I've mentioned ah Nigeria, Bahamas, et cetera, the percentage of, c even though they've had CBDCs deployed for you know a number of years, ah is still a tiny percentage, you know around less than 1% typically of M0, money supply in those particular countries.
00:13:21
Speaker
and So that's certainly one of the big concerns, if not the biggest concern. ah The other, I think, is just the you know the adoption what problem or what you're solving with the CBDC that isn't supported by and you cash payments, but more likely contentless payments and faster payments, depending on which country we're talking about.
00:13:40
Speaker
um And what can you do with a CBDC that you couldn't do with existing payment methods? Because if it doesn't have that um USP, then the risk is that it's not going to get broadly adopted. And, you know, therefore we end up with this kind of situation we have for those countries I mentioned already.
00:13:56
Speaker
and So understanding what those USPs may be, what new functions can you achieve? Is it going to be a question of the government, as in the case of China, you know, fostering and facilitating electronic band payments across the broader population?
International Payments and Network Challenges
00:14:10
Speaker
Is it access to offline payments, which is more difficult for ah typical digital payments today, etc. But what is it that's going to really make the difference? So I think there's the two key topics I would flag, the the concerns around privacy, which is as much a social issue as it is a practical implementation issue.
00:14:28
Speaker
And then the questions of adoption, really, what can you do with the CBTC that helps differentiate ah beyond what you can do today with the existing payment mechanisms. Right, and I think it's all about showing people what you can do with it instead of just telling them about these products. I think that that's a really good way to do that transition into this new technology. Okay, what can you do with these CBDCs that you couldn't do previously with other ah methods of payment?
00:14:52
Speaker
So let's elaborate on the use cases because we have tokenization that's giving us global borderless assets. You can fractionalize real estate or own art on chain from anywhere.
00:15:04
Speaker
um But are there particular use cases or sectors where you think that tokenized money will find its strongest product market fit first? Yes, for stable coins, clearly. Obviously, they came into existence to facilitate crypto trading and there's still a very large percentage of ah their use at the moment.
00:15:23
Speaker
But obviously, there's a huge focus specifically after the passing of the Genius Act in the US as far as payments are concerned, and particularly international cross-border payments.
00:15:34
Speaker
Because in advanced economies, they're already very efficient and inexpensive, faster payment systems typically in place. But for international payments, you know some countries don't have the benefit of those that modern payment landscape.
00:15:50
Speaker
And the correspondent banking network that is supporting international payments ah is struggling in some ah smaller countries. You know, there are some countries now which don't have access to a correspondent banking, which makes it quite convoluted in terms of how payments could be made there.
00:16:06
Speaker
ah So certainly that whole question of cross-border payments is problematic. ripe for ah greater support from different forms of tokenized money. And really, that's where we're seeing significant advantages as far as stablecoins are concerned, because they're a bearer instrument, obviously. they They can run internationally near instant ah transfers. Still, the challenge of the on-ramp and the off-ramp and the foreign exchange side of it, which companies are obviously stepping into.
00:16:36
Speaker
and The other forms of money, CBDCs and tokenized deposits, really have a challenge in terms of how are they going to bridge that that kind of international hurdle because they need some kind of network because they're not running on public blockchain networks as in the case of stablecoins to be able to achieve that. So we have things like Project Agora or Agora to give the formal pronunciation run by the BIS Innovation hub seven central banks and over 40 ah commercial banks, payment companies, and so on, which is looking to tackle that for both CPTCs and tokenized deposits.
00:17:14
Speaker
But realistically, it's going to be several years before there is a production platform of some sort ah that will support international payments for CPTCs and tokenized deposits in a remodeling, if you like, of the corresponding banking network.
00:17:29
Speaker
And then in the meantime, obviously, stablecoins continue to ah explode with you know new initiatives coming out from the likes of Stripe and others that are merchant acquirers and What Circle and Coinbase, etc. are
Private Institutions in Digital Asset Management
00:17:43
Speaker
doing.
00:17:43
Speaker
ah So stablecoins are accelerating and the non-stablecoin options ah still have significant challenges in terms of how can they can address that cross-border opportunity.
00:17:54
Speaker
For sure, for sure. And how do you see the role of private institutions evolving in this new world where both the asset layer and the money layer are becoming programmable?
00:18:05
Speaker
What kind of private institutions do you mean? Yeah, both the banking um or just the market, because we have, OK, the assets that's being represented digitally. That's pretty much but the tokenization process. And now these forms of payments.
00:18:21
Speaker
So would it change so much how the users interact with with the markets or how the private institutions target and their audience? What would be like that biggest notorious change?
00:18:33
Speaker
I think taking advantage as of what, in this case, StereoProCommerce can actually deliver in terms of being able to make payments much faster. So, for example, if you're a small shop and you're taking credit card payments today and you have to wait a number of days to for the funds to come through based on the credit card payment and ah you know, so much of a percent of the transaction cost going to the four-tier model that exists around credit card payments, as opposed to a stablecoin where the payment could be received much more quickly, you know, same day in that respect.
00:19:09
Speaker
um The fees can be less potentially. And, you know, we're seeing examples of what some of the major merchant acquirers are doing in terms of partnering with stablecoin issuers to be able to ah facilitate that.
00:19:20
Speaker
So I think, you know, from small businesses point of view, that kind of category of private institutions or larger ones as well, stable coins will make a significant impact in terms of ah providing alternative approaches to take payments in that respect.
00:19:36
Speaker
And if we see more and more consumers, you know, holding their cash in self-custodied wallets or custodied wallets in the form of stable coins, for instance, ah getting a yield where that's possible and using those wallets for payments to a greater extent, then, you know, we're obviously going see more and more applications that are taking advantage of that environment ah in order to be able to provide this kind of parallel application.
00:20:02
Speaker
digital economy in some respects based on stablecoins in terms of being able to do that. So, you know, whether you're an individual consumer or a small business or a large corporates, and there's going to be some significant differences and benefits associated with this, in particular corporates
Inevitability and Examples of Tokenization
00:20:18
Speaker
and also the banks. You know, one of the biggest advantages is how property mobility of stablecoins can be used.
00:20:23
Speaker
in terms of being able to rather than have cash left in accounts overnight, not necessarily earning any interest, ah being able to move the cash real time to where it's needed to terms of payments, basically managing liquidity on a real time basis and therefore you know saving for large corporates millions of dollars really in terms of being able to move cash around the company to where it's needed instantly.
00:20:45
Speaker
rather than being held to banking hours across different geographies and the time taken to achieve that, which could be days rather than minutes. And that's huge. I definitely think that that's going to be one of the or that is now, but even more as it continues to to be more widely adopted, one of the pros.
00:21:03
Speaker
um But building on that, do you think that the tokenization of everything is inevitable or will there be sectors or systems that that resist it? but Personally, i think it will be inevitable and that's our kind of basic hypothesis.
00:21:17
Speaker
Though it's certainly true that there will be some parts of the market which are already very efficient, for example, which you know the case won't be as strong and therefore it will take much longer to see that transition take place.
00:21:29
Speaker
And it's those parts of the market which are inefficient, have high levels of friction, high levels of cost, or poor levels of investor access. ah that are likely to benefit more quickly. So for sure, I think we'll see a phase transition and we can already see examples of that in that respect.
00:21:48
Speaker
um But you know even for efficient markets like equities, it was interesting to see NASDAQ's approach to the SEC to have ah approval for tokenizing equities, which as I said, an efficient market already.
00:22:00
Speaker
and So it shows that you know it goes beyond efficiency in some respects. um So I think that's but inevitably going to happen as we move to a digital economy.
00:22:11
Speaker
The future is going to happen. It's just going to happen in different places at different times. That's a really good good way to to describe it. And i think that, of course, we have to touch upon upon regulation on on this podcast.
Legal and Regulatory Challenges in Tokenization
00:22:24
Speaker
So I wanted to to ask, um do you think the legal world truly grasps that tokenization doesn't change the nature of the asset justice format? Because even though we've seen some some improvements in in regulation worldwide, there are still some policies that treat all tokens as if they're the same.
00:22:43
Speaker
So I just wanted to to hear your thoughts on that. I mean, ah it's certainly true. Every time I talk to banks or regulators, everybody has the view that the the transformation, the move to tokenized assets, tokenized cash, is nothing to do really with the technology at the end of the day. The technology is relatively straightforward. It works and it's proven to work.
00:23:06
Speaker
ah But the real complexity is in the legal and the regulatory aspects of this. So if I had my time again, I'd probably, rather than training in what I'm doing at the moment, I probably would have trained to be a lawyer because the know of the lawyers are going to take the biggest share of the pie, I think, in terms of the transformation.
00:23:24
Speaker
So, you know, across the board, I think this is a really key topic. And obviously it varies a lot country by country, jurisdiction by jurisdiction. um And it's actually understanding all the layers of interpretation um you know If only it was as easy as it you would like it to be in terms of, as you say, something which is just in the same asset, different form.
00:23:47
Speaker
and We just have the same risk, same legal and regulatory implication. But navigating through the complexity of legal and and regulatory change is not easy. It's very time consuming.
00:23:59
Speaker
I mentioned Project e Agora a little earlier. ah where there are seven national banks concerned five different currencies and the legal and the regulatory work streams of that are are massive in terms of the complexity that has to be navigated between those seven jurisdictions by way of example.
00:24:17
Speaker
Indeed, and I think that if law wasn't already complicated enough, I think that adding this new this new layer of ah technology and also these applications with with finance complicated even more.
00:24:30
Speaker
I think that's also why we do what what we do and create this type of content. um But finally, as we are close to wrapping up our our time today, From your vantage point in academic research, what's a question that you wish more technologists or policymakers were asking about digital money and tokenization but currently are not?
Consumer Safety and Education in Digital Money
00:24:51
Speaker
I think, I mean, I'm not a policymaker or a regulator, but i think the key considerations from my point of view, ah thinking about the market development is really having the right levels and commitment to consumer safety and education.
00:25:05
Speaker
um You know, there are many elements of what we're talking about here, which ah can be opaque from a consumer point of view. So having that safety education knowledge is important, I think. ah The transparency and fairness, you know, there are many things that might be concerning, mean coins, et cetera, in terms of understanding the transparency and fairness of what what's available, what's how things work, et cetera.
00:25:27
Speaker
Having the right focus on competition and innovation through that competition ah to ensure that we end up with a fairer and more resilient and cost-effective marketplace and economy as a result of that.
00:25:43
Speaker
Well, that's a great way to summarize it, indeed. I think it's all about having that that resilience, that that equality, so that we can have a ah safe and an effective adoption. So thank you so much once again for your insights today, Keith.
00:25:56
Speaker
Thank you so much for your time. It was a pleasure talking to you.
Conclusion and Further Resources
00:25:59
Speaker
And to our listeners, I think it's evident that tokenized markets are only as strong as the money that moves through them also. I think that Keith Baer made it very clear today, and the design of that money is crucial.
00:26:11
Speaker
So whether it's stablecoins acting as digital rails or CBDCs that are redefining public trust, we're watching the architecture of value get rebuilt in real time. So that's it for today's episode.
00:26:22
Speaker
Thank you once again, Keith, for joining us. Thanks to our listeners. And till next time.
00:26:30
Speaker
We hope you enjoyed our Hootenanny. Thank you for listening. For more hootful and hype-free resources, visit owlexplains.com. There, you will find articles, quizzes, practical explainers, suggested reading materials, and lots more.
00:26:45
Speaker
Also, follow us on Twitter and LinkedIn to continue wising up on blockchain and Web3. That's all for now on Owl Explains. Until next time.