Maechler: Trust in digital money key for future finance
BIS Deputy General Manager Andréa M Maechler emphasized the critical role of trust in money amidst digital innovations like tokenisation. Speaking at the Point Zero Forum, she outlined how to preserve this trust in the evolving financial ecosystem.
Defining 'moneyness' in a digital age
Andréa M Maechler defined 'moneyness' as the degree to which an instrument can serve as a trusted means of payment at scale, settle obligations at par, and circulate seamlessly.
This concept differentiates financial claims within the 'money stack,' from central bank reserves and cash at the top to bank deposits, money market funds (MMFs), and repurchase agreements (repos).
Central bank reserves and physical cash exhibit the highest moneyness, being ultimate risk-free assets supported by central bank credibility.
Bank deposits, while private liabilities, gain high trust from par settlement against central bank reserves and robust regulation, oversight, and backstop mechanisms like central bank liquidity facilities and deposit insurance.
MMFs and repos, though liquid, cannot be used directly for payments and must be converted into deposits, placing them lower on the moneyness spectrum.
Two tiers of trust: Central banks and commercial banks
The two-tier monetary architecture, comprising central banks and commercial banks, is fundamental for trust in money.
Central banks ensure price stability, safeguard financial stability through supervision, provide liquidity facilities, and guarantee par settlement via RTGS systems, ensuring the 'singleness of money.'
Non-bank financial institutions (NBFIs) now account for over half of global financial assets, forming a 'third, outer tier.'
While NBFIs extend credit and offer money-like instruments, they rely on banks for critical functions and payment settlement, leveraging the trust in central bank reserves.
This connection ensures NBFIs are part of the monetary policy transmission mechanism.
Tokenisation: Promise and peril
Tokenisation offers significant potential to improve payments and financial transactions through features like atomic settlement and 24/7 execution.
However, stablecoins, often operating on public, permissionless rails, inherit undesirable properties such as congestion and integrity challenges, hindering network effects and the singleness of money.
Integrating these innovations into the existing two-tier architecture, rather than disrupting it, is crucial for maintaining trust and stability in the next-generation financial ecosystem.