Scaling Digital Assets Requires Safer Settlement

The emergence of digital and tokenized assets has brought clear benefits to financial markets: speed, 24/7 availability and greater transparency. These are positive developments, and they are helping reshape how money moves through the system.

But in that progress, a critical distinction is being lost. There is a growing tendency to assume that all forms of digital money behave similarly and that, if value moves instantly, it has also settled cleanly. That assumption is false and could become dangerous at scale.

Markets do not simply need faster movement of value; they need that speed to come with proper operational foundations, certainty at the moment value changes hands, and infrastructure that can be relied upon consistently. Getting that right determines whether risk has been removed from the system or simply moved elsewhere.

In wholesale finance, where large-value transactions take place between sophisticated firms, settlement in central bank money remains the only form of settlement that fully eliminates counterparty credit risk between institutions. Commercial bank money arrangements can still provide legal certainty and finality of transfer when supported by robust legal and regulatory frameworks. But they expose participants to issuer credit and liquidity risk, which in practice constrains the scale and nature of the exposures most firms are willing to assume.

Recent developments in digital assets have brought these issues into sharper focus. Stablecoins, for example, are often described as digital cash equivalents. In practice, many stablecoins are backed primarily by short-term government securities, with bank deposits or cash equivalents held for liquidity management. Again, this introduces some exposure to commercial bank credit and liquidity risk. The nature of the stablecoin structure can also introduce exposure to interest rate movements, liquidity conditions and the operational integrity of the issuer, as well as a dependence on its ability and willingness to redeem at par. Episodes in which stablecoins have deviated from their peg demonstrate that this risk is real.

A clear example occurred during the Silicon Valley Bank (SVB) failure in March 2023. Circle disclosed that month that $3.3bn of its stablecoin ‘USDC’ reserves were held at SVB (around 8% of its total reserves), and USDC subsequently fell substantially below its intended $1 peg before recovering when U.S. authorities intervened. But even with third-party attestations and external auditors, questions about reserve backing, concentration exposure and other risks remain.

Tokenized money market funds (TMMFs) raise another set of considerations. They may offer institutional features, including yield and transparency, but their value fluctuates with market conditions, and liquidity characteristics can change accordingly. In practice, TMMFs also remain dependent on the structure, governance and operational framework of the issuing arrangement, while often operating within relatively closed or fragmented distribution environments. As value circulates across multiple platforms and networks, the interchangeability of these forms of digital money cannot be assumed.

This is not to suggest that these instruments lack a role. Banks can and do support a range of digital asset activity that settles in commercial bank money, primarily in contained environments or at limited value and scale. But wholesale market participants need a trusted settlement anchor—a way to settle exposures with certainty, in a form of money that eliminates credit risk from the settlement asset itself, rather than redistributing or concentrating that risk elsewhere in the system. Banks continue to rely on central bank settlement for systemically important flows, including high-value payments, securities settlement and liquidity management. In these areas of wholesale finance, the requirement for risk-free finality remains unchanged, whether market conditions are benign or not.

Advances in market infrastructure and operating environments are further increasing the need for safe, resilient settlement mechanisms. Assets have become increasingly tokenized and expectations for market infrastructure are extending beyond traditional operating hours. This creates a tension between the need for high-quality settlement and the demand for greater efficiency and flexibility. The response is not to lower the standard of settlement, but to extend it into new infrastructure that can work alongside legacy systems.

Industry initiatives are emerging to address this. Fnality, for example, enables institutions to settle payment obligations on-chain in central bank reserves—the cash leg that settles against digital assets. Central banks are also developing related settlement initiatives, many of which are focused on specific domestic or regional objectives. Fnality is designed to complement these initiatives by enabling interoperable domestic and global wholesale settlement capabilities that can operate alongside central bank and commercial bank infrastructure.

As digital money and tokenized assets continue to expand, exposures between institutions will grow in both volume and complexity. At smaller scale, these exposures can be managed within closed systems or through bilateral arrangements. At larger scale, that approach becomes inefficient and introduces systemic risk.

As markets move toward continuous operation, the question is no longer whether value can move instantly, but whether it can settle with certainty. Ultimately, the success of digital assets will not be defined by how fast value moves, but by how safely it settles.

Read the full piece on Traders Magazine.