Based on an opinion piece by London School of Economics visiting fellow Ousmène Jacques Mandeng, a new perspective emerges on the future of international payment systems. Mandeng argues that tokenised money market funds represent a superior alternative to stablecoins for cross-border transactions, potentially addressing critical inefficiencies in the $7.5 trillion daily foreign exchange market.
What to Know:
- Tokenised money market funds offer interest-bearing capabilities that stablecoins cannot provide, while maintaining lower risk profiles than traditional stablecoins
- Foreign exchange settlement currently faces significant challenges, with two-fifths of transactions lacking proper risk mitigation and settlement times extending to T+2 or longer
- The proposed system would enable instant settlement across currencies while eliminating correspondent bank exposure and reducing regulatory capital requirements
Current Payment System Faces Major Structural Problems
The global foreign exchange market processes daily transactions likely exceeding $7.5 trillion, making it the world's largest financial market. However, this massive system operates with fundamental flaws that create substantial risks for participants.
Settlement risk represents a primary concern, particularly given that approximately 40% of turnover-settled transactions lack adequate risk-mitigation measures. The market demonstrates high concentration levels, with the U.S. dollar appearing in nine out of ten traded currency pairs.
CLS Bank, one of the world's largest multicurrency cash settlement systems, provides efficiency for only 18 currencies. Settlement times typically extend to T+2 or longer for many smaller currencies. The absence of robust risk-mitigation measures for dollar-renminbi trades creates a significant material vulnerability in the system.
Money Market Funds Offer Proven Alternative Foundation
Money market funds have served as mainstays of the international financial ecosystem since the 1970s. These instruments rank among the safest private-sector financial tools available. They exhibit cash-equivalent properties during market uncertainty periods.
Portfolio managers and corporate treasurers utilize these funds to optimize cash management strategies. Subscribers obtain shares representing direct claims on underlying assets, eliminating issuer or manager exposure risks.
Government debt money market funds represent the highest quality option available. These constant net asset value funds invest exclusively in government debt. They typically avoid credit risk exposure entirely. The funds trade at par value and generate interest payments for holders.
Tokenising money market fund shares involves issuing these instruments on blockchain platforms. This process enables advanced blockchain functionalities including programmability and composability features. Transfer agents maintain official ownership records using blockchain platforms as registry and processing systems.
Tokenised Shares Provide Superior Settlement Capabilities
Tokenised money market fund shares offer significant advantages over competing assets such as stablecoins and tokenised deposits. The latter two options carry issuer and credit risks that tokenised fund shares avoid.
Stablecoins cannot pay interest to holders, representing a major limitation for institutional users. Tokenised deposits typically accrue interest at rates significantly below money market rates. Despite recent promotional efforts, stablecoins remain largely untested as international payment instruments.
Tokenised deposits require effective clearing infrastructure for cross-border payment applications.
This infrastructure currently does not exist in most jurisdictions.
Traditional spot foreign exchange settlement involves exchanging bank balances denominated in different currencies. The foreign exchange component almost always consists of claims on correspondent banks. Tokenised money market fund shares enable instant outright exchanges of tokenised shares across currencies.
This system creates economic equivalence to payment-versus-payment transactions among subscribers in both funds, as Mandeng explains. Compliance and transfer restrictions would continue to apply in cross-border settings.
Implementation Offers Significant Efficiency Gains
The combination of money market fund share exchanges with instant atomic settlement delivers substantial capital, liquidity, and funding efficiency improvements. Trading positions remain flat at execution, and received shares become immediately available for reuse.
Instant gross settlement significantly reduces intraday liquidity requirements. This approach should outperform funding arrangements under netting systems. Direct comparisons suggest important regulatory capital savings for banks through elimination of correspondent exposure and open receivables.
Money market fund shares qualify as securities under existing regulatory frameworks.
In jurisdictions where shares do not require central securities depository registration, including France, Germany, Switzerland, and the United States, tokenised money market fund shares can be readily issued and transferred on blockchain platforms.
Securities typically do not extinguish payment obligations under current contract structures. Legal agreements may require amendments to recognize share delivery as settlement mechanisms. Foreign exchange settlement represents an interbank activity, meaning banks generally possess authorization and operational capabilities for securities holding and transfer.
Key Financial Terms and Concepts Explained
Several technical concepts underpin this proposed system transformation. Settlement risk refers to the possibility that one party in a transaction fails to deliver agreed-upon assets or payments. T+2 settlement indicates that transactions complete two business days after execution.
Payment-versus-payment represents simultaneous exchange of assets, eliminating timing risks between transaction legs. Atomic settlement ensures that either all components of a transaction complete simultaneously or none execute at all.
Correspondent banking involves financial institutions maintaining accounts with other banks to facilitate international transactions. Net asset value funds maintain stable share prices, typically at one dollar per share.
Programmability in blockchain contexts refers to the ability to embed automated execution rules within digital assets. Composability allows different blockchain applications to interact and build upon each other's functionality.
Closing Thoughts
Tokenised money market fund shares present a compelling alternative to stablecoins for international payment settlement. Their established regulatory framework, interest-bearing capabilities, and superior risk profile position them as practical solutions for foreign exchange market inefficiencies. Implementation could significantly improve settlement conditions across a broader range of currencies while enhancing overall cross-border payment performance.