From Stablecoins to Settlement: Rethinking the Future of Payments

Digital cowrie shells

Originally published on Josh's blog

Intro

Money has always been a social invention, shaped more by collective human agreement than by regulatory or religious decree. From ancient seashells to cigarettes in prisons, “money” is whatever a community is willing to accept in exchange for goods and services. Because money derives its value from collective human agreement — and people’s beliefs, preferences, and behaviors evolve — money and payments too must adapt and transform to reflect shifting societal dynamics and technological innovations.

Although real-time payments (”RTP”) networks such as FedNow in the U.S., UPI in India, PIX in Brazil, and FPS in the UK offer instant, real-time settlement, they are exclusive to domestic use and are only designed to support each country’s respective fiat currency. As a result, other assets such as securities, bonds, and alternatives and countries without RTP networks must rely on fragmented and inefficient clearing and settlement infrastructure that typically requires days, rather than seconds, to settle transactions. By connecting all assets to an instant, open, global payment network, tokenization holds the potential to open up access to previously gate kept payment infrastructure and offers a generational opportunity for forward-thinking asset managers to disintermediate banks’ privileged access to official payment networks.

Money Today

Ultimately, people want money that is interest-bearing, safe, and sound. While bank deposits offer safety and soundness, protected by institutional guarantees such as deposit insurance that insure deposits up to $250k, they offer little to no yield. As of April 2025, the national average interest rate for checking accounts in the U.S. was ~0.07%. Comparatively, the federal funds rate currently sits at ~4.3%. With the current inflation rate at ~2.4%, bank depositors earn a negative real return on their balances. While money market funds offer interest in-line with the federal funds rate, they are not fit for payments because they are uninsured and lack connectivity to a real-time payment system. Our current monetary system fails because there is no money that simultaneously meets the criteria of being interest-bearing, safe, and sound — forcing individuals to compromise on at least one critical dimension when choosing where to store their wealth.

How are banks able to get away with paying 0.07% on checking accounts when the fed funds rate is greater than 4%?

Banks in the U.S. have a monopoly on payments because they are the only institutions with permitted access to the U.S. payment system (Fedwire, CHIPS, ACH, FedNow, etc). Whenever a nonbank institution wants to access the U.S. payment system, they must do so through a bank’s Federal Reserve master account — the account that provides banks with the ability to settle with other counterparties in central bank money (i.e USD). Through banks’ gatekeeping of the payment system, reinforced by deposit insurance, they are able to get away with paying near zero to depositors.

While banks in the U.S. maintain a monopoly over access to America’s core payments infrastructure, blockchains represent a radically different model — an instant, open, global payments infrastructure accessible by anyone with an internet connection. Where blockchains excel as an instant, open, and global payment rail, they lack in their connectivity to the traditional system. Specifically, blockchains lack the ability to settle payments in central bank money — an institutional requirement for any payment rail aiming to compete with incumbent networks on legitimacy, trust, and reliability.

Stablecoin Market Structure is Broken

Official payment networks settle in central bank money because central bank money provides transaction finality, safety, and systemic stability. As a direct liability of the central bank, central bank money is considered the lowest risk form of money and eliminates the counterparty risks associated with privately-issued forms of money such as stablecoins and commercial bank deposits that carry inherent credit risk. As such, central bank money should be used to settle obligations whenever possible.

While many today believe that stablecoin transfers over blockchain rails offer real-time settlement, in reality, stablecoin transfers are a real-time transfer of liability, shifting an obligation (i.e. the stablecoin) owed by the issuer from the sender to the recipient, rather than true and final settlement in central bank money. If we want stablecoins to compete with bank payments on feature parity and user experience, we need to prepare for a future in which consumers place varying degrees of trust across different stablecoin issuers — just as consumers today choose among competing banks based on perceived safety, reputation, and reliability. It’s unacceptable that today’s stablecoin market structure effectively forces consumers to hold liabilities issued by institutions they may neither know nor trust, leaving them exposed to issuer-related risks out of their control.

Imagine you’re a customer of Bank of America and someone from the fictitious Fourth Bank of Kentucky sends you money. As a Bank of America customer, would you feel comfortable accepting and storing your wealth in liabilities issued by the Fourth Bank of Kentucky? Definitely not! You’re a Bank of America customer — there’s trust established between you and Bank of America because you know them, and they know you. That trusted relationship doesn’t exist between you and the Fourth Bank of Kentucky.

However, this is exactly how the stablecoin market works today. When someone sends you a stablecoin, you’re forced to accept that stablecoin, even if you don’t know or trust the issuer. Just as consumers wouldn’t feel comfortable accepting liabilities from an unfamiliar bank (i.e. The Fourth Bank of Kentucky), consumers should not be comfortable accepting a stablecoin from an unfamiliar issuer. To gain legitimacy as a payment rail, stablecoins must evolve towards a model that respects consumer preferences across different issuers through the introduction of a settlement mechanism for inter-stablecoin payments.

Connecting Stablecoins to the Traditional System

In order for stablecoins to move towards a model that respects consumer preferences for different issuers, there needs to exist an inter-stablecoin settlement infrastructure to orchestrate and settle obligations across stablecoin issuers. This financial market infrastructure would in turn help consumers only accept stablecoins issued by institutions they know and trust and transition stablecoin payments from a real-time shift in liability system to a real-time settlement system. Real-time stablecoin settlement, however, is only achievable in practice once the stablecoin industry agrees upon a standard settlement instrument that can safely and securely settle obligations across issuers. But one problem remains, how do we achieve stablecoin payment settlement finality without access to central bank money?

As mentioned previously, banks maintain a monopoly over access to the core payments infrastructure in the U.S., meaning they are the only institutions with the ability to settle payments in central bank money. Stablecoin issuers could rely on banks to provide them access to the U.S. payment system, but doing so could be dangerous with many banks preparing to launch competitive stablecoin or tokenized deposit products once regulation permits it. While there are rumors swirling that some stablecoin issuers such as Circle and BitGo are applying for bank charters, it is unclear whether Federal Reserve master accounts would be granted with acceptance of their respective charter applications. Given the Federal Reserve’s historical reluctance to grant nonbanks with master accounts, it is safe to assume that precedent won’t change any time soon.

How, then, should the stablecoin industry go about achieving settlement finality on blockchain rails? In order to facilitate 24/7, real-time settlement for stablecoin payments, the settlement instrument used to facilitate settlement should also move 24/7 and real-time. Since any tokenized asset has direct connectivity to an instant, open, and global payments network, enabling seamless real-time transfers 24/7, a tokenized asset would make a strong candidate for a stablecoin payment settlement instrument.

The largest USD-pegged, fiat-collateralized stablecoins USDT (Tether) and USDC (Circle) primarily maintain their reserves in cash and high-quality, short-duration instruments such as U.S. Treausry bills and money market funds to preserve liquidity, stability, and confidence. The reserve compositions of USDT and USDC alike are heavily skewed towards U.S. Treasury bills and money market funds, with ~99% of USDT’s reserves concentrated in U.S. Treasury bills, repurchase agreements, and money market funds, and ~88% of USDC’s reserves concentrated in the Circle Reserve Fund, an SEC-registered government money market fund managed by BlackRock. Since the reserves of major stablecoins are heavily concentrated in money market funds (”MMFs”), MMFs emerge as an ideal payment settlement instrument for stablecoins.

While MMFs appear to be an ideal candidate for stablecoin settlement due to their liquidity, stability, and interest-bearing profile, as well as their ubiquity as a collateral asset for stablecoins, MMFs are securities and therefore live on inefficient securities settlement systems that are slow and cumbersome in comparison to modern RTP networks that can process and settle transactions instantly. As a result, traditional MMFs are ill-suited as payment settlement instruments for stablecoins because they rely on outdated securities infrastructure, which lack real-time settlement capabilities; however, tokenized MMFs offer a compelling solution by imbuing traditional MMFs with real-time payments capabilities.

Tokenized MMFs are already beginning to gain traction as a settlement instrument within the digital asset economy. Last month, Tassat, Arca, and tZERO announced a joint venture called Lynq — an institutional-grade digital asset settlement network that leverages Arca’s tokenized MMF $TFND as a settlement instrument. Also last month, the DTCC, the post-trade market infrastructure utility, announced a tokenized collateral management platform that allows for collateral to be settled instantly across financial market participants. The CME, CFTC, and ICE (the owner of the New York Stock Exchange) are also in the midst of piloting and exploring tokenized collateral for margin purposes.

While tokenized MMFs do not offer the same safety, soundness, and counterparty risk guarantees that central bank money nor commercial bank deposits do, they currently represent the closest tokenized liability available to central bank money due to their high liquidity, stability, and minimal credit risk. As the financial system increasingly moves toward “tokenizing every asset,” I expect that other forms of regulated liabilities such as commercial bank deposits and even direct liabilities of the central bank become tokenized. When that time comes, it’s possible that tokenized MMFs get displaced as the de facto payment settlement instrument for USD-denominated stablecoin payments in favor of something that is closer in nature to central bank money.

In the meanwhile, asset managers, through the issuance of tokenized MMFs, have a once in a generation opportunity at disintermediating banks by collectively becoming the access point by which the regulated USD-denominated stablecoin economy accesses the U.S. payments system. However, because money is a social invention, it will take collective human agreement and belief that tokenized MMFs are a suitable settlement instrument alternative to central bank money for this bold vision to play out.

Conclusion

Although robust regulatory safeguards, such as strict liquidity requirements, diversification mandates, and stress testing, are already in place to prevent MMFs from breaking the buck, their adoption as tokenized payment settlement instruments faces one significant barrier — the lack of deposit-like insurance or protection mechanisms. Unlike bank deposits, which benefit from FDIC insurance, MMF investors bear credit and market risks, creating uncertainty in settlement finality. This lack of absolute protection reduces consumer and institutional confidence, limiting MMFs’ viability as a universally trusted settlement instrument.

However, the history of U.S. banking prior to the establishment of the Federal Reserve offers a potential roadmap for addressing this issue. Before federal deposit insurance was introduced, banks managed deposit risk through mutualized, privately administered systems such as state-level insurance funds and clearinghouse associations that pooled resources to act as the lender of last resort during financial panics. By adapting this historical precedent, the tokenized MMF market could similarly self organize a consortium-based mutualized insurance fund or clearinghouse to spread risk and create a collective guarantee on deposits, thereby increasing confidence in tokenized MMFs as a secure and trustworthy payment settlement instrument for blockchain rails.

Tokenization is quickly changing the future of money. If tokenized MMFs emerge as the primary settlement instrument for USD-denominated blockchain payments, it could effectively open up access to the U.S. payment system to anyone with an internet connection, breaking the current bank-held monopoly over U.S. payment rails. This democratization of payment infrastructure would stimulate competition, reduce costs, and accelerate innovation, empowering underserved communities globally to participate, benefit from, and build on top of the U.S. financial system, transforming the United States into the largest layer 1 (“L1”) blockchain in the world.

If you found this piece interesting or want to discuss anything in further depth, feel free to shoot me an email at josh@sentinelglobal.xyz.