Digital assets have a settlement problem. Here’s why

Financial markets are increasingly real-time, continuous and tokenised — faster than at any other point in my career. Yet the infrastructure underpinning them is not evolving at the same speed and that should give us pause.

More than 70 countries have adopted real-time payments, with 266bn transactions conducted globally each year. Cross-border transactions are becoming cheaper, available around the clock and increasingly programmable. DTCC’s plans to tokenise treasuries and other securities, with production trades expected as soon as July, would bring the benefits of blockchain technology to one of Wall Street’s oldest and most systemically important infrastructures.

But the point at which value finally changes hands — settlement — has not kept pace. As new forms of money gain traction, that gap is widening, with serious implications for financial stability, liquidity and the ability of digital asset markets to scale at institutional size.

Without addressing this gap — including through models that enable settlement in central bank reserves, the highest-quality money available — faster payments conducted on blockchain will not remove risk, but move it around much faster.

Having run global markets businesses at some of the world’s largest banks and overseen open market operations at the Federal Reserve Bank of New York, I have seen how quickly small frictions in settlement can become faultlines in times of stress. During periods of extreme volatility — from the 2008 Lehman Brothers default to the sudden de-pegging of the Swiss franc in 2015 and Covid-19-related volatility and funding squeezes in 2020 — what mattered was if the cash and collateral settled reliably and on time.

The scale of what is at stake when stress becomes systemic is enormous. Swift, the global financial messaging network, estimates that it now facilitates roughly $5tn in cross-border payment flows every day. A significant share of that is wholesale activity — high-value transactions between large financial institutions such as banks and broker-dealers — where settlement risk is most concentrated.

A risky impression

Digital asset innovations, such as stablecoins and tokenised deposits, are making mismatches more visible because they can create the impression of instant settlement while the underlying risk remains unresolved. Payment transactions may be executed instantly and continuously, while the funds needed to complete them can still take hours or days to arrive.

Banks continue to rely on batch processes and correspondent banking networks to move and settle money across borders. While these systems have proven remarkably resilient over decades, they often require pre-funding and liquidity buffers to manage timing mismatches, increasing cost and complexity.

Why does this matter? Because the gap between execution and settlement is becoming a constraint on how far digital asset markets can evolve. If left unaddressed, it risks slowing the very transformation that financial markets are so eager to embrace.

At the New York Fed, resilience was engineered into the system, tested under stress and relied upon when markets came under pressure. Similarly, for decades, that same of level of trust has been anchored in central bank money settlement, which provides the safety, legal certainty and finality that wholesale markets require. It is also why systemically important payment and settlement infrastructures have long anchored final settlement in central bank reserves.

New payment mechanisms and digital assets are expanding rapidly, often outside the traditional structures that have historically provided that stability. Stablecoins, for example, may prove unsuitable as settlement assets for systemically important wholesale markets. Their reserve backing can be opaque, redemption into fiat money can be slow, and some have shown a tendency to de-peg from their reference currency under stress.

That distinction was reflected in the Bank of England’s latest policy update on Monday, which reaffirmed a separate regulatory approach for sterling stablecoins, while also emphasising the importance of central bank money in wholesale settlement.

Wholesale markets therefore need a trusted settlement asset for tokenised instruments: one that is continuously available, legally certain and final.

New public and private sector models are beginning to show how this could work, including from Fnality. The Bank of England-regulated wholesale payment system operates within the existing banking framework and enables participating financial institutions to settle tokenised obligations on-chain using central bank reserves. It is the only live operator to have a BoE omnibus account for this purpose, and is seeking to establish additional payment systems in the US and Europe.

Other models are also emerging, from tokenised commercial bank deposits to regulated digital-money instruments. Some may be well suited to lower-value or retail use cases. But for large-value wholesale transactions, many market participants continue to regard central bank money as the safest and most robust settlement asset.

The interoperability test

The future will involve many actors: domestic instant payment networks, traditional settlement systems, new tokenised platforms and, potentially, central bank digital currencies. Market participants will not always choose the safest option. Some will choose what is fastest, cheapest or most convenient. That may mean settling across fragmented systems with varying levels of risk.

The question, then, is whether those systems can connect. If they cannot interoperate, the financial system will become more fragmented and risk will become harder to see, let alone manage. Money must move across these systems seamlessly, not become trapped in silos. Policymakers will need to set frameworks that preserve trust and stability across borders, while the private sector must build infrastructure that can operate at scale, across systems and in real time.

There are already signs of how this can be done. The BoE has taken a leading role in exploring how central bank money can operate within new types of settlement infrastructure. Building on that foundation, policymakers and market participants have an opportunity to ensure that faster payments are matched by safer, more reliable settlement through greater interoperability, legal clarity and cross-border co-ordination.

With the G20’s 2027 roadmap providing a strong foundation for how payments should move, the next phase must focus on how they should settle. After all, the real test of any financial system is not how quickly money moves, but whether everyone can trust it has arrived.