Published: December 19, 2024
Traditional and electronic money have served their purpose. Digital money will soon be setting the payments agenda for corporate treasurers. Well, possibly. TMI consults an expert about the outlook for treasurers as more commercial banks consider a tokenised future.
There is a huge difference between electronic currency and digital currency. It is a difference that could soon place old-school models at the end of the line as far as their practical value is concerned. With tokenisation appearing to enable a significant positive shift in how businesses, banks, and individuals are able to transact, there is much for corporate treasurers to ponder.
And increasing numbers, it seems, are doing so. As something of a pioneer in this field, J.P. Morgan’s JPM Coin is dollar-backed tokenised money for its customers (although it prefers the term “blockchain-based bank account” rather than tokenised deposit). From a standing start in 2019, it is now covering daily transactions of around $2bn. More digital money projects are following, so now is the time for treasurers to explore what’s in it for them.
In practical terms, electronic money is simply a digital representation of a physical fiat currency, and thus is tied to ‘conventional’ systems of use via online banking, cards or digital wallets, for example. Conversely, digital currencies such as CBDCs and stablecoins, have no underlying physical form, remaining permanently in a digital state, and face no such restrictions.
The potential broad-based utility of digital money has driven Gilbert Verdian, Founder and CEO, Quant, to spend many years developing supporting systems and technologies which ensure that the form’s flexibility becomes reality. Quant provided the technology for Project Rosalind, the Bank of England’s (BoE) CBDC experiment, notably around retail use cases. It’s work also underpins the UK’s Regulated Liability Network (RLN), a shared ledger concept created to help major global banks explore the use of tokenisation, especially the recording, transfer, and settlement of individual liabilities.
Having worked in HM Treasury from 2009 to 2011, during the global financial crisis period, Verdian had early access to a government paper exploring the idea of tokenisation and how it might benefit financial services (making the UK one of the first countries to officially acknowledge the potential of digital money). In a later role as Chief Security Officer at Vocalink, Verdian oversaw the cyber-security of the systems that power the UK’s real-time payments, settlement, and direct debit systems. He formed Quant in 2018.
As a long-haul practitioner in the electronic and digital money space, Verdian notes today that at the core of what the industry is doing, and what government wants to happen, “is the transformation of money. And we’re moving from electronic money to digital money”.
The BoE’s Project Rosalind is key to the success of the vision of money tokenisation in the UK. It has been focused on establishing a real-world, practical difference between the current forms of electronic money, and the idea of digital money, to ensure there is clear value in proceeding.
That value, says Verdian, has been established through the development of programmability, so that when certain set conditions are met, corresponding actions are automatically taken. “Programmability of money has now been opened up to the financial industry, and banks are starting to explore it for their own use cases,” he notes. “And now we can see a foundational difference between electronic and digital money, with many new use cases for the latter in banking, from delivery, reverse payments cross border, and FX conditional payments.”
In practice, the commercial-bank money space has leveraged learnings from the CBDC project. It has been able to add more advanced programmable functionality to digital money, with client bank accounts now in the mix. “This was transformational because we were able to show that it is possible to do more than just pull transactions,” says Verdian. “Now it enables requests to pay, split pay, multipay, and a host of other new features where users can pull and push money across different accounts and banks into one pot of money.”
With the financial logic of programmability embedded into digital money, the automation of many of the manual processes that finance departments and banks perform today is increasing the appetite of corporates as they realise the possibilities. Indeed, complex triggers can be inserted around FX hedging, for example, and companies can also pay or receive invoices 24/7 in real time, even extracting and redirecting the tax element automatically.
However, tokenisation and programmability also enable the creation of entirely new real-world functionality that could not otherwise exist. The work continues to push these boundaries, says Verdian. “We’re now looking at how to define what those new financial logic functions could be.”
As an example, he suggests that a treasurer may want cross-border payments where settlements are linked between different banks, but with hedging against certain FX risks locked until triggered. Where currently such transactions are executed over the phone, with the bank’s account manager often pressed to find out whether a payment has been settled or even sent, this could easily be coded into digital money.
“In this instance, the stress of counterparty risk, arising from not knowing the whereabouts of the money, just evaporates with programmability,” comments Verdian. And that risk is managed on both sides. “The seller knows the buyer has the money, but it’s been locked from its account until what was contractually agreed has been delivered. And the buyer knows the seller must deliver to unlock that payment, with the transaction able to be reversed if conditions aren’t met,” he explains. “But the real beauty of digital money programmability is that every transaction can have its own unique rules; treasury is not limited with how it transacts, whatever the use case is.”
With that understanding, it’s clear that innovation in this space must continue to ensure delivery. In the UK, the Payment System Regulator’s New Payments Architecture (NPA) initiative, launching in 2026, is already steering a path to future models. NPA sets out a new way of processing interbank payments in the UK, replacing the existing Faster Payments scheme with an ISO 20022-based instant credit transfer solution intended to reduce risk by using prefunded settlement capability.
“NPA ensures banks are motivated to innovate because if they don’t, government will mandate the change for them,” comments Verdian. “What we’re seeing today is the banking sector responding to government, demonstrating real B2B and B2C innovation with account-to-account programmability.”
The good news is that in the new era of digital money and tokenisation, banks will be able to integrate with, and overlay programmability onto, existing core banking systems and structures, including open banking, faster payments, and real-time gross settlement (RTGS).
“There is no need to create a whole new infrastructure with new rails because it makes use of what already exists,” reveals Verdian. “Banks will be able to continue serving corporates in any jurisdiction because programmability works across any rail.” With the regulatory and compliance elements remaining the same, too, he sees it as “a clever way to upgrade to 21st century digital money without a complete upheaval and transformation of the entire system”.
Arguably CBDCs will be able to offer the same flexibility as commercial bank digital money, so why not just use these? In the UK, CBDC programmability has been a Quant project, mostly around retail but with some wholesale use cases emerging. “CBDCs are coming, but they’re years away,” says Verdian. “The banks are saying maybe by the end of the decade; corporates want programmable, cross-border, digital settlements across any jurisdiction now.”
There is no likelihood of expediting CBDC projects by major central banks because they need to wait for the right market conditions to emerge, he explains. It will be massively disruptive when they do because all commercial banks will be required to integrate CBDCs into their flows. Meanwhile, many commercial banks are already far along the path of innovating, developing infrastructure and more use cases, and integrating these with their existing offering.
By taking the best of what CBDC offers, but being in a position to apply more advanced programmability to their own commercial bank deposits, it’s not unreasonable to claim that commercial bank digital money will signal the end of CBDCs before most have even started. Indeed, with money in a bank account ledger that is programmable for clients in almost infinite ways, CBDCs do seem to have a fight on their hands, notes Verdian. “This is the trade-off between what the Bank of England and regulators want industry to do, versus what the banks want from the regulators and from the central banks.”
The reality is that all transactions ultimately settle with central bank money anyway, so arguably it makes more sense to forget about any future CBDC benefits and instead leverage the unlimited programmability of commercial bank digital money today. This is a compelling argument, says Verdian, who suggests that by doing so it enables more efficient commercial bank settlement with the central bank.
“Liquidity can be better managed because they’re able to see payments in real time. And then, as needed, or when a threshold is met, commercial banks can settle directly and natively with the central bank on RTGS. Otherwise, they have to adhere to faster payment settlement times, which are more frequent, and higher risk as they must be pre-funded.”
What’s more, with current systems and settlement processes developed decades ago, their limitations are rapidly being exposed. These constraints could add further stress to the financial system, suggests Verdian. “Fortunately, commercial banks are seeking a future-proof alternative, where they are designing and building what they want for the future. And that benefits businesses, consumers, treasurers – everyone.”
For that developing critical financial infrastructure to succeed, commercial banks need corporates to get on board with it. “They’re talking to their customers,” observes Verdian. “They’re defining what types of new products they can create for corporates, commercial bank account holders and businesses, and they’re looking at implementing this in the very near future, because, as we all know, realising new ideas within banking can be quite time-consuming.”
Verdian considers banks to be at the stage now where they are deciding, with clients, what that critical infrastructure should look like, and how it will be implemented. “We will see this vision rolled out within corporate and commercial products, probably within the next 18 months. There is a necessary rapid go-to-market for this because the opportunity is there and corporates want this type of functionality from their banks now.”
There is always a danger that banks, in their desire to be first, will inadvertently create interoperability issues. “Quant was established to solve this challenge,” responds Verdian. The answer is to incorporate interoperability from the outset.
“We’ve demonstrated the interoperability of all forms of money in the RLN project. One digital pound versus one cash pound versus one electronic pound is the same money at the end of the day. The uniformity and functional consistency of money is already there. All banks can design and bake that in from the start so that a digital pound from any of them will work right across the system. It’s interoperable by default.”
System security has also been “baked in from the start”, continues Verdian. “It has to match or better what we have today, to ensure trust in the whole system.” To this end he reveals that one security tool identified within programmability, which is currently under development, “will tackle fraud properly once and for all”.
The present system tends to deal with fraud after the fact, he explains. But with programmable locking of a payment until certain criteria are met, all checks can take place in the transaction, in real time, pre-execution. “It’s now possible to apply a holistic view of fraud to each transaction, with multiple check points deployed, before the money has left the account or has been settled.”
While Verdian notes the focus within tokenisation has always veered more towards assets, he considers “the flip side” – the tokenisation of money – is finally gathering momentum. “J.P. Morgan’s JPM Coin was one of the first to go live. But now we’re seeing more banks begin to innovate and bring this capability to their corporate clients”.
Suggesting that it will soon be technically possible to settle any digital asset with tokenised money, he believes that this will unlock significant liquidity within the system. “Corporate treasurers often hold assets on their balance sheets that aren’t being used effectively - this could be cash sitting idle or other assets that are difficult to move or convert. These assets can become a burden, as they don’t generate returns and may even cost money to maintain,” he comments.
By using digital money, companies can quickly and securely settle these assets. Digital money eliminates barriers to liquidity by enabling instant, low-cost transactions that can be completed directly between parties. This, believes Verdian, frees up significant amounts of capital, allowing treasurers to redirect it toward investments, operational needs, or opportunities that drive growth, in short – “maximising the potential of their capital”. And that is a treasury win by any standard.
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