Tokenization of Money

Welcome to the Bankers Bookshelf. book authors and researchers of the most interesting publications that explain the present of banking and its fintech future. And today I'm the great pleasure to host for this conversation, Michael Salmani and Salim Yadzici, the editors of a brand new book, Tokenization of Money from Fiat Currencies to Stable Coins. Michael, Salim, welcome to the Bankers Bookshelf.

Thank you. Pleasure to be here. Thank you, Paolo. As you know, the audience is used to start with the book Elevator Speech.

So, Salim, why should they read this book? And then also a few words on how you came up with the idea of editing such an important piece of work. Do you want me to count 40 reasons for them to read the book or let's sum it up to the top five okay thank you paulo for uh having us uh indeed we're going to be three as the co-editors of the book but one of our uh editors is uh on travel so he couldn't make it today but we are together with michael As you know, it's been so long with you since we had a webinar.

I think in the pandemic's time, it was 2020 at Fintech Istanbul. So I was the host. Now you are the host. So thank you for having us.

So the story behind the book is, I think, is the most important part to why the audience would like to read the book because we started talking about these issues maybe one and a half year ago with a CBDC project. So then that was very popular. But as we started to investigate and inquire more research on the literature and industry examples, we thought it would be more comprehensive to go beyond CBDCs and create a more holistic approach about tokenization. So, as we knew, this concept is also so wide.

We tried to limit it with tokenization of money and especially on the stable coins. At the time of our first talks, debates on stable coin regulations were so hot. So we tried to create a book which has a wide audience, starting from academicians, bank professionals, and also regulators, and also anyone interested in these topics. So we had a wide, very wide audience indeed.

So the book provides a comprehensive and multidimensional analysis of how money is evolving in the digital age. It is structured to guide the reader from foundational concepts to practical implementations and also for the future outlook. That's why it has a very broad audience, I believe. So let's say that the book is a collection of different perspectives and contributions that basically explain what is the hype, what is real, but also what is going to be the future of money.

And Michael, hype or reality? Why do we need another form of money, being a CBDC or a stable coin? Don't we have enough? Well, that's a very good question.

And that's indeed part of the, I think one of the joys of doing this book is to try and drill down what is the reality and what is just hot air, because there's an immense amount of hot air being put around around blockchain and about crypto. But there is a lot of really valuable substance in there. And especially in the global context, if you're trying to transfer money from one place to another, it tends to take quite a lot of time, cost a lot of money. You don't quite know where the money is as it's moving from A to B.

And this new tokenized money is really completely changing the game. It means that you wrap up your money into what is technically called a cryptogram. You can think of it like a casino chip with an unforgeable version of money, which you can basically send across the internet from A to B instantly as quickly as you send an email. And so that, of course, is a very different way of transferring money to the sort of SWIFT and Correspondent Banking and ACH and Card Rails and all the other ones that we have today.

So that is why lots of different forms of this tokenized money are now emerging. So they've already mentioned CBDC, which is sort of coming from the central banks. Then the commercial banks are looking at deposit tokens. And then the sort of fintech ecosystem are looking at stablecoins, just to mention a few of them.

And so there are these various new forms of money emerging, And that's what we try to look at in this book to see which of these have a future. How do they differ? What are the important strategic aspects of that for banks, for regulators? And that's why I think it's quite exciting to be looking at this right now.

Selim, what's your perspective here? So, as Michael told, the perspective is so wide because any country, any jurisdiction can have a project on digital money. So we have seen many forms in the CBDCs and many projects in CBDCs in many countries but we believe that stable coins is going to be the future of money instead of CBDCs Or there might be a debate. Is it going to be on the same platform in the same country or in the same region at the same time?

So the future is going to show us which is going to be the real preference of the people using that forms of money in the digital economy. So, Salim, past the initial enthusiasm of blockchain, that sort of faded a bit, and the frenzy of cryptocurrencies, they were moved towards some form of money defined as CBDCs and stable coins. CBDCs are central bank digital money, so they are more regulated by definition, sort of imposed on an ecosystem where all the players have to comply and figure out what is the business case.

Stable coins instead is a form of private money. So it requires entrepreneurship since the very beginning to figure out across all of those potential elements of value that Michael described, which is the best form to articulate that value, sharing across the ecosystem and build new opportunities upon that. But both of them are part of what's called tokenization. Now, while part of the audience is fully aware of what tokenization is, there are also folks which are joining the back of a shelf recently.

They might not be fully comfortable. So we said the why, there is an opportunity, there is technology. But what is it then that shapes this opportunity through this technology? How do we define tokenization and its various forms, Salim?

So we can form many kinds of tokenization in terms of assets, money, and or intangible assets. So for that reason, we just focused on the tokenization of money just for the money. So there are some forms in tokenized deposits, as you know. So it depends on the use cases in the forms of adoption.

So if people prefer to use tokenization in either format, I mean, both for their deposits or for their other assets, they can use it in each form. Okay. So essentially, you say money, assets, intangible assets. makes me think the money is what I have, assets is the money I want to have, and intangible is the money I will ever have.

But now, on a tokenized platform, I can access the three of them, potentially, right? So one thing is a stable coin, which is a form of exchange among counterparts that allows you to get something. The asset can be a security, can be even a real world asset. So it could be a piece of real estate.

There may be fractional investing, something of big value that can now be parceled. And intangible is something different. It could be maybe a piece of art on a digital landscape that now can be sort of represented through a token and shared securely and efficiently among counterparts. Michael, what entertains you the most about the variety and the ingeniousness of the entrepreneurs on the tokenized ecosystem that you want to share with us?

Yeah, I think this is one of the most exciting developments in payments I think we've ever had, right? I've been in that sector for 20 years, I think, and this is probably the biggest change that we're seeing. I mean, you're right, the tokenization will eventually reach all sorts of other assets, right? Real estate and securities and bonds and art and whatever.

But our book actually looks more at the fundamentals in the beginning of this development, which is definitely in payments, right? And once we've got payments working, then I think the other ones will also happen. So that's why our book concentrates on payments. And as we've explored, there are various parallel initiatives, right?

There's CBDCs and stablecoins, deposit tokens, others. And my guess is we will see all of these compete. And may the best man win is what I would always say in that case. But what we've got to ensure that they interoperate, right?

We don't want lots of silos, right? We don't want sort of Bank A doing their deposit token and Bank B doing theirs and five different stable coins and seven different blockchains and 14 different protocols and five CBDCs. That would be a mess, right? So we've got to build an infrastructure where this will all interoperate.

So that is one of the key challenges that the industry has now got to solve. Okay, so Michael, I just published a piece of research from the IBM Institute for Business Value titled Banking in a Tokenized Economy. And there I shared part of my perspective where I believe the thing is fairly circular. So we have payments, money, and we have assets, maybe securities, the first to go.

And what I think is that money in terms of payments makes it a bit difficult to be realized because it's still an ecosystem perspective. Think about cross-border corporate. One needs to get motivated to build it, like a large corporate needs to aggregate an entire ecosystem, maybe cross-border for everybody to see the features. It will happen, right?

But it's a road which has its own complexities. On the sound of security instead, there is a stronger sentiment, starting from the US, as the New York Stock Exchange said they want to tokenize, and the chairman of the SEC said the tokenization of the NYSE will happen in two to ten years and he said more two years than ten years And big players like BlackRock are now thinking of tokenizing themselves in a way to create if you like, a choke point, the entry point into the market, because you don't really need to tokenize the ETF, but they will transform the economics of an entire ecosystem.

So I think that as centralized institutions also have an interest today to tokenize, they will create demand for stable coins because they will be needed to support those initiatives. And that will fold back an opportunity for interoperability because, as you said, those elements are now appearing like in a patchwork. But we need that network effect to sort of align everything and make sure that it is interoperable. So I believe that the game between the assets and the money will create that virtual circle that will allow tokenization to flourish.

But from here to there, there's many things that have to happen. So the why has been discussed by many. The what is a lot of technical forms. The how is always the most complex element, right?

So which are the elements that in the book, Michael, your authors identify in terms of how tokenization works? I'll gladly answer your question, but let me first disagree slightly with your previous statement, if I may. Yeah, you are arguing that the push for sort of stable coins and tokenized money will come to securities, etc., if I understand you right.

A reinforcement more than a push, I think. Or even stronger an enforcement. My take on the subject is this stuff is happening whether security is adopted or not. Whether the higher level things like securities and digital assets and digital real estate and securities adopt that, just alone the fact of digitizing the transfer of money, just the payments alone is already happening at the trillion dollar scale.

Now it's being adopted by all major banks around the world, all major regulators are looking at that. The first regulations are being passed in the US and in Europe and other places. This already has its own dynamic. And I think the securities and these other things will come on top and add further volume and pressure to that.

So that's just on that quick disagreement, if you will allow, on where the volumes are coming from at the moment, right? But you actually asked about how, and I think that's a very fair question. And that is what we try to gather a lot of opinions about in the book, because I don't think anybody has a crystal ball. Nobody has the single answer.

So we have asked the ECB to say, what do they think about CBDC, for example, the digital euro. We've asked experts in China to say what is happening in there or in Southeast Asia, sort of how to link QR codes with blockchain payments. We've asked lots of important banks like Standard Chartered what their view is, how the tokenization will happen. There are some who go for CBMT, Commercial Bank Money Token.

That's a big initiative in the German market. What is driving them? We've asked network providers, like there's a friend of mine who used to be a high-level executive at Citi who's now done his startup to now connect this whole ecosystem with a platform called Ubix, how he intends to unify all these different initiatives. So on the how, we've asked experts, I think, all around the stakeholder systems, from regulators, from central banks, from commercial banks, from fintechs, from infrastructure providers, also Worldline and Gizica and Devrient, you know, established providers, what they all think of this.

And I think once you've read the book, you get a very good feeling of where this thing is and where it's going. So definitely a must-read book as it contains so many perspectives. And I guess, Selim, that the world is round, but it's not even. So did you find any relevant differences when you scouted opinions, as Michael said, across different industry players and different geographies?

Is there anything that got your attention and you want to share? But every jurisdiction, I mean, every region has its own challenges. We saw that while we were talking about the book with our authors, because in the U.S.

they have some different challenges. In Europe, they have some other construction in their mind. In Middle East, they are thinking differently. And on the East or the Far East, they are thinking very differently.

But the main problem, I mean, the main theme of those debates are focusing on first on the ecosystem design, how to design an ecosystem that these stable coins work. The second one is in the business models, because every part of the world needs some other business models different than the others. And we try to focus on the regulatory frameworks because as we saw three main regulatory frameworks from US, from Europe and from the East and also the technological infrastructure.

Maybe this is the easiest part of this team and also a transformation in the payment systems. Those are the main focuses that we have seen over the world. So there's no one set fits all. Definitely, it's very rich, articulated.

That also means very complex. You cannot just copy and paste. You need to understand the regulation, where you live and want to operate. You need to understand the way the ecosystem works, right?

You need to scout the business case that makes sense in terms of economies of scale. And then all in all, you start to apply technology. And that is where you say, we might want to see more homogeneity because we also need that interoperability that Michael indicated although there will be differences in the way things are implemented And also clearing systems is a problem How are you going to make the clearing all over the world? Yeah, so actually we need to talk about that because Michael made a little example at the beginning talking about the chip in the casino that it was very, if you like, intense, call it this way, right, also concerning.

Now, so far we talked about the past, which is the why. I mean, the inefficiency of the system, we've been seeing it for many years, right? Decades. So clearly, you know, you can find many whys for the tokenized economy.

We talked about the present, which is the what. So what people are really doing, they're implementing CBDCs, they're implementing stable coins, they want to tokenize securities. Some are thinking about other world assets. And we try to move into the future with a how, because we are seeing across the world different ways of implementing the opportunity because of regulation, because of ecosystem, because of habits.

But really, Michael, what do we see in the future of money? Well, this is the beginning of this evolution. So we cannot yet say where this will end, right? Things in payments typically take about 10 years, even if you're thinking about really simple things like migrating cards from a mag stripe to a chip card, right?

So this sort of really structural revolution will probably be with us until I retire. So we will not know what the answers are. But what we have tried at least to make a stab at this in the book, and we've done a scenario analysis, basically. We've set these to some possible scenarios how this whole topic may turn out and put some probabilities against that, which we think are likely.

And made some pretty bold predictions, I think, on some things. Some things people will not like. Some people may find surprising. And I think that's good because we aim to also stimulate the debate on where this topic is going.

So let's start saying the quiet part now. the world would people want like? Well, I think everybody will like if we get a more efficient way of transferring nothing. I mean, that's a no-brainer, right?

I mean, some people in Europe ask, why do we need this? Because in Europe, we already have instant, basically free, transparent, 24-7 cheap payments, right? So some people in Europe are asking, why do we need this? But the rest of the world isn't like Europe.

And especially if you go cross-border, if I want to transfer some poor Filipino worker working in Saudi Arabia who wants to transfer the money back home, they have to pay quite a lot of money to remittance services. And that will all go, right? So what does this mean for Western Union and for SWIFT and for correspondent banking and everything? We don't want to unveil all that's in the book because we want people to read it.

But what is the most provocative scenario, one of the most provocative scenarios that we can discover by reading the book until the end? I'll give you a few provocative scenarios, right? One of them is there are some people who don't like CBDC. This may be a big...

You mean the bankers? The bankers, certainly. The commercial bankers, they don't like CBDC. But maybe they're wrong.

Some bankers have been wrong before. It just happened. And maybe CVDC, the digital euro, will be a fantastic success. But one of the scenarios is, indeed, that Europe will fall further behind because it's been massively distracted by all the efforts being put into the digital euro.

That is one of the scenarios that we pose and we put our ability against that. You have to read the book to find out what that is. Well, I tell you mine, as I mentioned in this research, asking 500 execs across institutions worldwide about a potential scenario where CBDCs take over retail payments. 33% said CBDCs are likely to replace the retail payment system fully.

I was actually surprised. And it could be differences across the world, but it was pretty intense. Of course, wherever CBDCs can be applied. The data I found surprising.

I thought the number across XX would be a bit less. I don't know which probability or sentiment you touched to this scenario. Okay. I've been at 30% lower.

We are all curious to read the book and figure it out. Exactly. But I think one of the joys of the book was it was a collaborative effort, right, between Selim, who is an academic, between Koskun, who is a central banker or ex-central banker, now also an academic, and myself, who is a sort of humble practitioner. So we look at it from different perspectives.

And so if you put these things together, then I think you get maybe a more reliable look at the future than if just some interested party like a central bank or a commercial bank or a fintech looks at this. We've tried to give a balanced, thoughtful view on what possible scenarios are and what their probabilities are. Michael, Salim, I want to thank you for the opportunity you gave our audience to learn more about this new book, Tokenization of Money from Fiat Currencies to Stable Coins.

I remind everyone, The Banker's Bookshelf is the opportunity to learn from people like Michael, Salim and the authors of the book about what is really happening in banking and also shed a light into a future, likely or not, worth debating and discussing. Thank you very much. So thank everybody for attending. I haven't attended this episode 32 of the Bank of the Book Shelf.

Enjoy the jingle.