One of the hardest things I’ve had to grasp about money is that an entity can have ample liquidity and still be unable to settle its next obligation The hierarchy of money explains the vertical dimension. It shows that fiat money is an interconnected web of liabilities, and it clarifies the counterparty risk we take on with each layer of liquidity: central-bank reserves, commercial-bank deposits, stablecoins. It maps the different tiers of "money" What it does not fully capture is the fragmentation that exists within those same tiers. It tells us nothing about where a particular asset actually sits, or whether it can be applied to the specific settlement sitting in front of us, even when that asset belongs to the same tier of money we need Case in point: a bank can hold reserves in its RTGS account that are unavailable for an operation settling inside an FMI structure. It can own eligible collateral yet be unable to move it from the custodian and place it under the counterparty’s control in time to rebalance margin. It can hold dollars, but in the wrong correspondent bank or after the cut-off You then realise payments are not settled by aggregate liquidity. They are settled by eligible cash, sitting in a specific account This has a direct consequence for the balance sheet. The operational buffer is sized against the cumulative net outflow that can arise while the treasury desk is still mobilising fresh liquidity, including under stress. The longer and more uncertain that interval, the more cash and collateral must be prepositioned Just a quick caveat here: operational friction is only part of the story. It’s easy to oversimplify, but these buffers are heavily driven by macroprudential and structural mandates, strict cross-border capital controls and legal entity ring-fencing that physically trap liquidity The financial system uses tools such as netting, intraday credit, committed lines, repo and FX swaps to shrink that requirement, yet none of them eliminate it. All of them still depend on credit limits, haircuts, operating hours, market capacity and on the assets being available the moment they are needed This is the thinking behind Creating More Liquidity in Markets, our latest report at Tempo (Link in the first comment) I tend to obsess over balance sheets, but liquidity mobility is not simply about moving a token "faster". It is about shortening the distance between owning cash or collateral and being able to apply it to an obligation, without having to invent a new instrument, a new integration and a new liquidity pool for every market One of the clearest lessons from the various DLT solutions of recent years is that a shared settlement layer, paired with private execution environments, can solve the confidentiality problem without also forcing the isolation of the liquidity that backs each trade But mind you, faster settlement does not automatically reduce funding needs. Immediate gross settlement can actually increase them if netting is lost, and interoperability may simply shift the timing mismatch onto an issuer, a dealer or a liquidity facility. That is why the trade-offs matter What we need to examine is whether the architecture lowers the consolidated peak of cash and collateral required to keep settling, after taking account of netting, intraday credit, haircuts, legal eligibility and exit conditions under stress If the ability to live on the same ledger and move beyond double-entry accounting delivers that reduction, we are talking about balance-sheet capacity being released I would add that we still do not know the true economic impact, because the operating standards, risk management and balance-sheet practices of every participant on that network would change as well What I do know is that at Tempo, we're going to find out

Stablecoins don’t become a true monetary system just because many people hold them as an asset. They become one when they migrate to the liability side of the economy, when companies and households don’t just receive payments in them, but also pay suppliers, service debt, post collateral, pay salaries, and settle taxes in the same unit Until then, the off-ramp stays active and the circuit keeps closing back into traditional bank money What we need to keep an eye on is the matching between stablecoin receivables and stablecoin payables. When that matching is low, the stablecoin functions mainly as a bridge asset, dealers keep converting the token back into bank deposits When the matching is high, the issuer’s own liability can finance long chains of economic activity without changing form or constantly returning to the local banking ledger. The system scales because only the residual imbalances require FX, inventory, or external rebalancing But closing the circuit doesn’t eliminate intermediation. As soon as obligations denominated in stablecoins need credit, a new layer emerges: dealers, lenders, repo markets, and leverage One often-overlooked feature of stablecoins is that they don’t just help individuals escape a weak local currency. They also displace the local bank as the primary monetary interface. Yet banking doesn’t disappear, it just reappears around the stablecoin, not only to provide backing, but to supply the elasticity that a fully backed token cannot create on its own The future of stablecoins isn’t a world without banks. It’s a world in which the stablecoin becomes the private monetary base on top of which an entirely new form of banking is rebuilt

Tokenized Money for Banks: Tokenized deposits 1A. Tokenized deposit An existing deposit recorded on a tokenized ledger. -Balance-sheet impact: If the legal claim and redemption terms remain unchanged, capital, LCR and NSFR should broadly follow the underlying deposit. -Advantage: Programmability with the smallest prudential departure from conventional deposits. 1B. Deposit token A native transferable token that represents a direct, unsecured claim on the issuing bank. -Balance-sheet impact: No automatic increase in RWA, but Basel does not permit stable-retail-deposit treatment. If holders cannot always be identified, it is treated as unsecured wholesale funding, weakening LCR and NSFR. -Advantage: Bank money that can circulate beyond the bank’s conventional ledger. First-party stablecoins 2A. Own balance A reserve-backed stablecoin issued directly by the bank. - Balance-sheet impact: If backed by segregated assets, redemptions within 30 days receive a 100% LCR outflow before eligible HQLA offsets. Segregated reserves also attract NSFR encumbrance treatment, while issuance can increase leverage exposure. - Advantage: Full control over issuance, reserves, distribution and economics. 2B. Subsidiary A bank-owned entity issues the stablecoin from a separate legal balance sheet. - Balance-sheet impact: If consolidated, much of the prudential impact returns to the banking group. - Advantage: Legal separation and dedicated governance. 2C. Consortium Multiple banks issue through a common entity or shared arrangement. - Balance-sheet impact: The direct effect depends on consolidation and commitments. Equity stakes, guarantees, redemption obligations and liquidity facilities can consume CET1, leverage and LCR capacity. - Advantage: Shared infrastructure and broader distribution without one bank carrying the entire system. Third-party stablecoins 3A. Prefunded The bank holds third-party stablecoins before customer demand arises. - Balance-sheet impact: Third-party issued stablecoins normally receives at least 85% RSF and produces no assumed LCR inflow. Replacing cash or reserves with it therefore weakens liquidity ratios. Capital treatment depends on its Basel classification. - Advantage: Liquidity, immediate availability, product distribution and operational simplicity. 3B. Secured loan The bank finances stablecoin liquidity through a collateralized loan. - Balance-sheet impact: The loan enters RWA and leverage exposure. Collateral reduces capital only if Basel recognizes it, while funding the loan with HQLA can weaken LCR and NSFR. - Advantage: Provides liquidity without holding the stablecoin inventory directly. If you’d like to find out more, I’ve included the research paper in the first comment

Most assume that stablecoins are replicating the role of Eurodollars and expanding the offshore dollar system. This is not the case. In reality, stablecoins primarily substitute for specific layers of the existing system - particularly operating and settlement balances - which can even reduce the credit multiplier in the segments that matter most to the Fed The open question is what happens when new monetary claims are created one layer above the token. This article examines how this new collateral channel actually works, what conditions are required for it to scale, and why its stress dynamics are structurally different from those of the traditional Eurodollar system.

I agree Seeing dollar flows is always the symptom, never the root cause. It's the release valve for a system that isn't functioning properly On an individual level, this flight to the dollar is entirely rational and stablecoins make that on-ramp incredibly easy The issue arises when this has the potential to scale to a point where it becomes outright monetary substitution, the full consequences of which remain a wildcard A local deposit turns into an offshore dollar claim, FX demand becomes unrelenting, domestic funding becomes less sticky and the central bank is forced to rebuild friction at the perimeter We need to find a balance between transactional dollarization and portfolio dollarization, which is exactly why central banks find themselves in such a tough spot It's all well and good to build better off-ramps that allow the global population to escape local currencies, but that approach is entirely rooted in the biases of our current financial system Instead, we should be exploring ways for currencies with diverse attributes to play a more efficient role in the broader ecosystem, ensuring that holding them isn't so penalizing for the end user