With each passing day, tokenisation is slowly becoming a bigger part of traditional finance. But as the change happens, Europe is starting to ask a much simpler question in relation to that. What money will actually be used once all of this moves on-chain?
Now, the ECB is already trying to build a bridge between blockchain, tokenisation and traditional finance through projects such as Pontes. On the surface, the idea isn’t that complicated.
Just imagine a European government bond being traded on a blockchain instead of going through today’s traditional financial plumbing. The bond can be tokenised. And that means the trade can settle faster, with potentially less paperwork and fewer middlemen involved.
But at the end of the day, someone still has to pay for that bond. And that is arguably where things start to get a bit more interesting.
In the crypto market today, stablecoins often play the role of digital cash. Let’s say I want to buy something on-chain, there’s a good chance I’ll be using either USDT or USDC to do it.
And therein lies the problem for Europe’s ambitions. Almost all major stablecoins are tied to the dollar. In fact, the ECB estimates that dollar-denominated stablecoins account for around 99% of global stablecoin supply.
That means Europe could spend years building a modern financial system using blockchain technology, only to find that the money moving through that system is still mostly digital dollars. And from Europe’s standpoint, it is not ideal at all.
This is why a project like Pontes isn’t just about making blockchain settlement faster. It also gives banks the ability to settle tokenised transactions using central bank euros. To put it more simply, Europe wants to make sure that if traditional finance moves onto blockchain, the euro isn’t going to get left behind.
That being said, it doesn’t mean that stablecoins are going away either. They can still have a role to play. The question is what sits underneath everything as the final form of money that people trust.
European bonds, funds and collateral could all move onto blockchain without requiring Bitcoin, Ether or even USDC to settle those trades. That essentially tells us that blockchain adoption and crypto adoption are not necessarily the same thing.
Come what may, traditional finance may very well end up embracing the technology behind crypto while keeping the monetary system underneath it very familiar.
If so, the next key question isn’t so much whether finance actually does move on-chain. Instead, it is more about what money ends up running through it.
This article was written by Justin Low at investinglive.com.