A new form of money is emerging with the latest technological advancements. It complements cash and other current means of payment, and their coexistence provides a wider range of access to simple payment options for society.

The irruption of what is known as digital money unlocks a variety of opportunities, spanning from guaranteeing greater inclusion, to satisfying the needs for instant payments and digital services.

What is digital money?

In an increasingly digital world, new needs and opportunities arise. Also, new forms of money emerge, leading to a growing adoption of digital money. Digital money is considered as any form of monetary exchange which is issued digitally and that fulfills the functions and properties attributed to money, such as: a unit of account, an accepted means of payment, and a store of value.

1. Cryptocurrencies: They use cryptography for both, their issuance and for the circulation and control. Bitcoin is the main reference after its creation in 2009. It paved the way for a large variety of cryptocurrencies, such as Ethereum, Cardano or Solana. But the high volatility of its value and its low acceptance plays against it, which means that it does not serve as a unit of account or as a means of payment.
2. Stablecoins: They arise to mitigate the main drawbacks of cryptocurrencies, such as high volatility and lack of support. In general, their value is pegged to that of a fiat currency, such as the dollar or the euro, or a safe-haven asset, such as gold.
3. Tokenized bank deposits: An innovative way to store and transfer value. Deposits are represented by tokens and function like traditional ones, with the advantage that they can be programmed to provide more security to certain financial transactions with digital assets.
4. CBDC (Central Bank Digital Currency): Form of digital money issued by a central bank, which is the digital representation of the fiat money of a country or an economic area. It is issued and backed by the corresponding central bank, as is the case with banknotes and coins.

Digital money becomes a clear opportunity for the financial system. It could imply an opening and democratization of investment in certain assets, providing access to users who were previously excluded from such investments due to entry barriers.

The digitalization of money provides the sector the opportunity to capture new business by launching more efficient and innovative products, and satisfy the needs of synchronization between the delivery of a product or service and its associated payments, providing more security and transparency to users. A key step in financial innovation that generates more efficient, secure and agile banking services.

Tokenization and its opportunities.

Another important technological advance that can have a great impact on monetary systems is the tokenization of all types of assets. Among these may be included financial assets and money itself, as well as the transactions that can be carried out with these tokenized assets.

But what is tokenization and what is its purpose?

Tokenization can be defined as the digital representation of physical or traditional assets on a DLT network, which can also be divisible, cumulative or programmable. This type of digital tokens contains all the data that represents the asset, having the ability to be exchanged multilaterally between the participants of these DLT networks without centralized control. For example, in tokenization of real estate assets, the need for a notary could potentially be eliminated, and the real state asset could be distributed among different owners, to which they wouldn't have access to in an individually form.

The traditional financial system is immersed in numerous asset tokenization initiatives. A paradigm shift to improve current operational processes and their settlement.

• Finally, another strong feature of tokenization is improving regulatory compliance. The risk of error is reduced, making it easier to manage rigorous compliance requirements by programming standards directly into smart contracts, even at the token level.

The European Union has become a pioneer worldwide by promoting regulation with the MiCA Regulation, which provides legal certainty to the sector, supporting innovation and protecting users. This regulation came into force in June 2023 and its general application will be gradual until 31st December 2024.

The new regulation establishes requirements for cryptoasset issuers and cryptoasset service providers. The former are required to provide complete and transparent information on the cryptoassets they issue. And it imposes mandatory registration to providers, and requires a series of security measures to prevent money laundering, among its main novelties.

Use cases in the sector

The sector is working on multiple use cases to test the viability of asset tokenization and its commitment as an alternative or complement to cash. An additional form of money that can coexist in the global payment system. The European Central Bank is studying the creation of a digital euro, and it already seems that in the sector it is taken for granted that the money tokenization provides greater benefits in an eventual wholesale CBDC (wCBDC), which would provide security and maximum guarantees to wholesale use cases that the financial sector is developing in DLT networks.

In parallel, the Bank of Spain has launched an experimentation programme to validate the use of digital tokens for the settlement of wholesale payments and securities transactions. A testbed for a wCBDC in which to simulate transactions of financial assets settlement in central bank money.

Iberpay, within the framework of its strategic plan, has been working for more than four years and promoting different sectoral initiatives and proofs of concept in this field, with the main Spanish banks and in collaboration with supervisory authorities.