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Digital Money issuers pyramid

USD

Monetary System Brief Overview

Outside Money/ Commodities

Tokenized Deposit Stablecoins

Retail rCBDC & Wholesale wCBDC

Stablecoins/ Flatcoins (Cryptodollars)

CENTRAL BANK

U.S. BANKING SYSTEM& U.S. TREASURY

INTERNATIONAL BANKS/ FIsNON-FINANCIAL INSTITUTIONS

DECENTRALIZED PROTOCOLS

NON-ISSUERNobody's liability

Fiat Stablecoins (Eurodollars)

Non-redeemable

L0

L1

L2

L3

L4

Regulated Money of thePayment System

OfficalPayment SystemSettlement Units

Hardest Money/ Asset

Softest Money/ Asset

End users access startsHERE!

Contraction

Expansion

In expansionary periods the area of ​​each level increases and in contractionary it is reduced

+ Scarcity

- Scarcity

Liquidity crunch

ISSUED MONEY/ LIABILITIES

REGULATED PERIMETER

UNREGULATED PERIMETERShadow Banking

Click on the buttons to expand

Within this perimeter, the banking sector's liabilities at Level L2 primarily make up the regulated money we, end users, use for daily transactions. This circulating money is key as each currency unit can serve one function at a given time: 1) it can be hoarded, which potentially has deflationary effects, 2) spent on goods or services, 3) invested or financed into a project where it can be better spent, enhancing productivity, or 4) used for speculation or yield-seeking in certain financial and gambling markets. To maintain trust, despite the potential for increased moral hazard, banks have direct access to central bank reserve lending (via the discount window) and a public backstop like the U.S. Federal Deposit Insurance Corporation (FDIC) that ensures bank deposit redemption for central bank reserves up to a certain limit, supporting uniformity, parity, and singleness of money across the banking system.

The singleness of official money is ensured by the fact that transfers and payment transactions involving money issued at official levels (Central Bank L1, Banking System and Treasury L2) are settled in the central bank's liabilities L1, specifically bank reserves, which constitute legal tender. Only the Banking System and the Treasury are privileged to directly access and hold these reserves as assets on their balance sheets.

Any individual private user can access liabilities issued by the banking system or the government (Level 2), but not those of higher levels. In other words, any individual can directly withdraw or redeem their assets (liabilities at Level 2) against the reserve assets held only by the banking system.

A liquidity crunch occurs during episodes of contractionary monetary policy or during economic shocks. Liabilities issued at each level of the hierarchy seek redemption from the liabilities at the immediately higher level (stored fractionally as harder reserve assets), causing prices of softer and riskier assets to decline due to decreased demand, while their supply remains constant, or vice versa. If the money issuer at level L(X) fails to meet redemption demands for its liabilities due to insufficient liquid harder reserve assets or asset maturity mismatches, it can potentially result in insolvency (e.g., SVB Bank). This ultimately reflects how the entire monetary system depends on the monetary policies (expansionary or contractionary) defined at the apex of the pyramid, the central bank at Layer (L1).

DEC. STABLECOIN/ FLATCOIN ISSUER BALANCE SHEET STRUCTURE

ASSETS

LIABILITIES

Digital Money IssuedDLT/ Blockchain

Assets/ Money mutualized by the token holders

Brief Explainer

Insurance buffer

Flatcoins have a periodic yield target:Yield % = Inflation %

Price Peg OR #TokensIncrease

Reserves composed of one or combinations of these assets.

Decentralized Stablecoin tokens

A decentralised stablecoin is a cryptocurrency that is designed to maintain a stable value, typically by being pegged to a fiat currency, such as the U.S. dollar. However, unlike fiat-backed stablecoins, decentralised stablecoins are not issued and backed by any central authority or custodian. Instead, they rely on a variety of algorithmic mechanisms through the use of smart contracts, to maintain their peg.

Fiat-Backed Stablecointokens

Equity for the CDP

Cryptocurrency endogenous

Flatcoin tokens

Flatcoins are a decentralised stablecoins that deflate their pegged price based on the reference economy inflation rate (for example deflating the USD in line with the United States inflation rate). This is done to protect the purchasing power of the stablecoin over time.

RWA tokenized

Inflation Rateconnector of the relationship

Cryptocurrencyexogenous

Crypto LP or/and LSD tokens

Overcollateralized buffer

Mutual Yieldfrom assets

Decentralized StablecoinsPROS & CONS

FlatcoinsPROS & CONS

Hover over boxes to expand info.

Decentralised stablecoins typically adopt 3 models for reserve custody:

  1. Users custody the assets in the form of collateralised debt positions (CDPs).
  2. A multi-signature (multi-sig) wallet is responsible for managing the assets seeking yield or distribute the stablecoin token through secondary markets, very often through Algorithmic Market Operations (AMOs).
  3. The protocol itself, through smart contracts, functions as Protocol Controlled Value/ Liquidity.
It is also common for assets to not remain idle and generate yield. This yield is distributed proportionally to the holdings in the form of tokens or as a variation of the pegged price to users. Flatcoins, as a variation of the above, deflate the pegged price of the stablecoin based on the reference inflation rate (increasing the price proportionally).

Pros The same as decentralised stablecoins plus... Loss of purchasing power reduction. By distributing purchasing power in the form of tokens or by correcting the pegged price (deflating the currency to the target inflation rate), they counterbalance the loss of purchasing power of the pegged currency. Cons The same as decentralised stablecoins but correcting this points... Lack of sovereignty. They maintain dependence on the fiat system. As a passive mechanism, they rely both on the monetary policies of the currency they are deflating, as well as on corruptible off-chain information that is not adaptable to each economy (currently only US and UK inflation rate oracles are available). Lack of flexibility. They apply a symmetric correction to inflation for economies that are fundamentally asymmetric and divergent in structure, potentially perpetuating inflation in the monetary system. Highly yield dependent. There is a requirement to generate a yield or provide overcollateralisation on their assets equal to or greater than the target inflation rate.

Pros Stability. Designed to maintain a stable value, making them less susceptible to price volatility than other cryptocurrencies. Decentralisation. Not controlled by a central authority. This can provide more privacy, freedom, and resistance to censorship. Efficiency and accessibility. They facilitate inclusion to stable money via an infrastructure system that is more efficient than the current one. Transparency operating on public blockchains. Cons No common settlement units. The lack of standardisation around a common reserve asset for settlement limits the singleness of money and good institutional adoption. Loss of purchasing power. The user loses their purchasing power in the same proportion as the debasement of the pegged currency. Collateral volatility. The high volatility of the collateral makes it heavily dependent on overcollateralisation, making it capital inefficient and limiting the 1:1 parity with the peg. Regulatory Uncertainty could potentially lead to future regulatory challenges. Smart Contract risk, being susceptible to bugs, exploits, or hacks.

Fiat-backed stablecoins are digital tokens, with similarities to traditional e-money or money market fund shares, pegged to fiat currencies like the U.S. dollar. Each token backing corresponds to real money in a bank or financial custodian, sometimes outside the U.S., leading to "pseudo tokenised eurodollars." These stablecoins offer digital transactions without the usual cryptocurrency price swings.

Endogenous cryptocurrency is digital money that is created within a specific ecosystem, like a DLT, blockchain network or even a DApp ecosystem, rather than being a pure outside asset like gold or other digital commodities. Its value is often determined by the activities and trust within that ecosystem. Stablecoins whose stabilising mechanism is largely associated with endogenous cryptocurrencies are known as algorithmic stablecoins.

Exogenous cryptocurrency is digital money whose value is not determined by the activities within its own DLT or blockchain ecosystem. Instead, it's influenced by external factors affecting the market demand-supply relationship.

Real World Assets (RWA) tokenised are various types of assets that have gone through the process of converting real-world assets, such as real estate, art, commodities or even issued securities into digital tokens that can be traded on a DLT/ blockchain. This makes it possible to buy, sell, and invest in these assets in a more efficient, transparent and accessible way, such as partitioning the share of these assets.

LP (Liquidity Provision) and Liquid Staking Derivative (LSD) tokens are special digital assets. LP tokens are given to users who add funds to a liquidity pool in a decentralised exchange. LSD tokens represent staked assets that earn rewards but remain liquid, meaning you can trade or use them without unlocking your original stake. Both make it easier to earn income and stay flexible in the crypto world.

The Overcollateralisation Buffer in Collateralised Debt Positions (CDPs) for stablecoins is extra security. Imagine you borrow $100; you might need to put down $150 worth of assets as collateral. This extra $50 is the "buffer," making it safer for the lender. If the value of your collateral drops, the buffer helps prevent immediate liquidation. It adds a layer of safety for both the borrower and the stablecoin system.

Mutual Yield from assets on a balance sheet is the income or profit generated from the asset holdings that is passed proportionally to the stablecoin holders, often expressed as a percentage of the asset's value.

The value of deflating the currency or distributing the generated yield can be done in two ways: either by periodically distributing the yield in the form of newly issued tokens allocated proportionally to the token holdings or by periodically raising/lowering the pegged price.

WORLD MONEY SYSTEM BRIEF OVERVIEW

MAIN FEATURES OF INDEPENDENT PYRAMIDS CURRENCY SYSTEMS

The world monetary system, a Dynamic Cone defined by hierarchical Currency Pyramids expanding and contracting over time. Competing pyramids where those with larger areas, like the USD, represent dominant world reserve currencies.It is a Hierarchical System both within each currency and between different currency systems.

Interest rate (P1)

Par price (P2)

Price level (P3)

Exchangerate (P4)

1. Four Prices of Money

L1

2. Credit-Based, Fractional Reserve Hierarchy

3. Limited policy toolbox

4. Dealers between hierarchies

USD System

EUR System

JPY System

L2

Foreign Exchange = Price between currencies. Ex:EUR/USD

Outside Money

Non-redeemable since commodity standards collapse

US GDP

Primary dealersDirect market access to issuer's liabilities

Secondary dealersTrade on secondary markets

Dealers by level(L1) Central Bank Liabilities(L2) Banking System Liabilities(L2) Govenment Liabilities(L3) Private Sector Liabilities

USD

Credit created & distributed through competitive financial markets.

Main Policy GoalStabilizing the (P3) relationship:

Main Policy Toolbox1. Setting S/T policy interest rate (P1)2. Influence S/T policy rate range via OMOs.

Money supply

Purchasing Power (Price Level)

USD

USD

USD

EUR

USD

USD

t0

t0

t1

t1

1. Hierarchical structureCredit issuance with a % of harder assets on reserve

2. Hierarchical access & privilegesAccess & privileges vary by agent type at each pyramid level.

3. Money creationBoosting bank reserves and creating deposits via loans

Challenges & Distortions

Par price, P2 (Money hierarchies relationship). It is the face value of the legal tender money/credit as guaranteed by the issuing authority, the central bank, as lender and dealer of last resort. The ability to redeem deposits (Level L2 money) for central bank reserves (Level L1 money) at par is a feature of the monetary system for stability purposes, ensuring that these different forms of money are seen as equivalent in value. Its importance in the monetary system is derived from just how the system's architecture is designed in tiers or levels for the distribution of money.

Price level, P3 (Domestic purchasing power relationship). It is a measure representing the average cost of goods and services in an economy, indicating the purchasing power of a unit of currency as a relationship. Setting this relationship correctly for economic stability is core to central banks monetary policy. The real stability of a currency is gauged by its price level stability, which reflects its true purchasing power. This explains why currencies like the USD can seem stable in exchange rates with other currencies but still lose purchasing power over time. For example, the USD has lost about 96% of its value or purchasing power since the Federal Reserve was founded in 1913.

Interest rate, P1 (Time relationship). Represents the cost of borrowing or the price of credit. Its importance in the monetary system is underscored by its role as the primary policy tool for regulating the elasticity of money through the demand of credit in the current credit-based system. It can be thought of as the premium that the lender receives for deferring the use of the money into the future.

Exchange rate, P4 (Foreign purchasing power relationship). It is an outcome indicator that reflects the price ratio between currencies. Ideally, without major central bank interventions or market deviations, ‘overshoots’, from speculative attacks, it mirrors the relative purchasing power of two currencies. A currency with lower purchasing power tends to be less demanded and depreciates compared to a stronger one. Some countries peg their currency monetary policy to dominant ones (P4 anchor), sacrificing policy independence. Others anchor their policy to specific targets (P3 anchor) and allow market forces to determine their currency's floating exchange rate.

Hierarchical structure. Each lower level of each currency system pyramid issues cumulative credit, fractionally backed by harder reserve assets from the level above (higher-level issuer's liabilities), forming a pyramid structure inside the world monetary system's cone. Only liabilities issued at level 2 have a public backstop (by central bank and deposit insurance scheme) and a 1-to-1 redemption guarantee for liabilities issued at level 1 (Central Bank). As you go down the hierarchy, trust in the higher issuers, who can swap or redeem for harder money at par if needed, grows.

Hierarchical access and privileges. A credit system, by design, creates dependency of the debtor on the creditor. Especially when the creditor has privileges in money creation.There are two important questions to understand in order to grasp how the monetary system works: What is the process and who are the agents involved in the creation of regulated money? and which are the access rights and privileges that shape its distribution? L➊ Central Bank, CB: Accesses all domestic and foreign assets. Some CBs have direct access to other CBs' reserves via swap lines. Their key privilege: loaning new reserves to banks "ex-nihilo". L➋ Commercial Banks: Accesses CB (L1) and lower-level liabilities. Their key privilege is creating new deposits via loans "ex-nihilo", regulated by capital and liquidity requirements. L➋ Government: Accesses CB (L1) and lower-level liabilities, but cannot directly create money. They finance fiscal policies through taxation, borrowing (issuing bonds), or CB debt monetisation. L➌ Private Debt Issuers: Accesses physical cash (L1), bank deposits (L2), and lower-level securities. They issue credit IOUs backed by L2 or lower-level securities (L2 or below). L➌ Corporations and end Users: Accesses physical cash (L1), bank deposits (L2), and lower-level securities (L2 or below).

Credit creation. Predominantly, regulated money is credit, created by two institutions: central banks (L1) issuing ~3% of money as physical cash distributed by banks, and commercial banks (L2) contributing ~97% through bank deposits. New money emerges when central banks boost bank reserves, while commercial banks create real economy money: deposits via loans, responding to credit demand. Seigniorage is the profit earned from the privilege of issuing regulated money. Two types in modern banking: public seigniorage, which is the profit the central bank (L1) makes from issuing new currency or reserves, transferred to the government; and private seigniorage, which is the profit commercial banks (L2) make when they create money through the lending process, beyond the interest they earn on their assets minus the interest they pay on their liabilities. Both processes involve the creation of money "ex-nihilo". Moral hazard in seigniorage arises when protected entities, central and commercial banks, prioritise profits and print excessive money. This can cause inflation or market bubbles. The issue intensifies if banks are deemed "too big to fail" or favor rapid gains over secure lending, destabilizing the economy.

Limited policy toolbox. Central banks (L1) discretionally controls money elasticity by setting the short-term interest rate for bank reserves (primary market) and adjusting the policy rate range intervening inter-bank reserves markets through open market operations (secondary markets). They can increase reserves and lower rates by buying securities or decrease reserves and raise rates by selling them. Lower rates incentivise borrowing expanding money supply and viceversa. Policy delayed effects take 12-20 months to fully impact longer-term rates and the economy. Short-term interest rates, set with future economic conditions in mind, depend on transmission across financial market maturities. Policymakers manage market expectations to steer economic behaviour.

Policy goal. Stabilise the purchasing power of a currency, measured as the quantity of goods and services that a unit of that currency can buy, reflecting the currency's real value in terms of tangible outputs. Monetary policy aims to preserve this purchasing power relationship by aligning money supply elasticity with the real economy's consumption and investments, ensuring price stability as a result. To achieve this, policymakers rely on economic data.An imbalance between an economy's absorptive capacity and its money supply can shift purchasing power among society members, leading to social inequalities and price level fluctuations, either inflation or deflation. Money elasticity, influenced by credit demand, governs the Money Pyramid's quick expansion with new credit, slow contraction with repaid loans at different maturities, and balance with debt refinancing, without effective calibration of the economy's absorptive capacity. Creditors keep the net interest margin as profit.

Policy challenges arise from restricted control over domestic and foreign money demand. Money demand can be influenced top-down through Central Bank's OMOs or bottom-up by the commercial and shadow banking system. When commercial banks face liquidity demands they can't meet from shadow banks, the central bank intervenes to stabilize financial markets, essentially creating money from the bottom-up. In other words, if regulated money issuers have to meet the liquidity demands of shadow banks (opening central bank lending facilities), then shadow banks are indirectly creating money. Despite policy decisions at the Money Pyramid's apex, balancing access to primary or secondary credit markets (who has access), distribution through financial markets (how is money accessed), and for what purpose, if it is for real economic spending or for financial contracts spending, is beyond the central bank's direct control. Distortions. Inflation is not only a monetary phenomenon but a wealth distributional one. Reasons why: Credit access: Wealthy individuals often have easier access to credit due to their assets, deepening the wealth gap. Leverage and repayment: The ability to leverage new credit means the wealthy can invest and grow their wealth even further and repay loans effortlessly, leaving others behind. This perpetuates a cycle where the rich get richer. Hoarding of money: Money kept idle doesn't cause immediate inflation, but when eventually used, it can trigger inflation, impacting those without initial credit benefits. Financial asset inflation: New money, often invested in assets, can inflate their prices, benefiting existing owners that have access to financial markets and sidelining others. Real economy disconnect: Rising asset values might not correspond to improvements in goods, services, or employment.

The need for dealers. Since all forms of money below Outside Money at Level L0 require a matching counterparty liability, elasticity in the money supply across hierarchy levels necessitates dedicated dealers. These dealers foster competitive financial markets by facilitating the exchange of assets and liabilities across various levels, all while profiting from the buy-sell spread. This process essentially enables money distribution and transaction activity within the hierarchy. Primary dealers have direct access to market making for the money issuer’s liabilities. Meanwhile, secondary dealers trade these liabilities on secondary markets after they have been initially issued.

Dealers by level L➊ Central Bank Liabilities: Primary dealers like Bank of America Securities, Inc. participate directly in Federal Reserve market operations. Secondary dealers include smaller banks trading reserves in the Federal Funds market. L➋ Banking System Liabilities: Commercial banks like Bank of America act as primary dealers creating deposits. Secondary dealers include non-bank financial institutions like credit unions. L➋ Government Liabilities: Primary dealers buy U.S. Treasury Securities directly and distribute to other investors. Secondary dealers include smaller banks, funds, and individual investors. L➌ Private Financial System Liabilities: Various financial institutions, such as Money Market Mutual Funds, act as primary dealers. Secondary dealers encompass other financial entities and investors trading private-sector liabilities.

  1. Gold
  2. Silver
  3. Bronce
  4. Crude oil
  5. Natural gas
  6. Wheat
  7. Corn
  8. Coffee
  9. Sugar
  10. etc.

OUTSIDE MONEY PHYSICAL & DIGITAL COMMODITIES

PHYSICAL COMMODITIES

DIGITAL COMMODITIES

  1. Bitcoin (BTC)_Ledger 1.0
  2. Ethereum (ETH)_Ledger 2.0
  3. Radix (XRD)_Ledger 3.0
  4. Litecoin (LTC)
  5. Bitcoin Cash (BCH)
  6. Cardano (ADA)
  7. Polkadot (DOT)
  8. Chainlink (LINK)
  9. etc.

Brief Explainer

Outside money, or commodity money (which is inherently global), refers to forms of money that are not created within the financial system or by monetary institutions, in the form of I Owe You contracts (IOU). They are not money issued based on having an asset in reserve, nor are they created as a result of lending or credit operations. Rather, they are assets that possess intrinsic value, independent of any promise to pay by an entity. Note: In today's monetary system, central bank liabilities are considered outside money due to their unredeemable, fiat nature, a topic heavily debated in the field of monetary economics. Of all the properties that good money has naturally converged to over time (scarce, divisible, portable, fungible, durable, verifiable, censorship resistant, acceptable), digital commodities embody all of them except acceptability. A money supply with a deterministic programming introduces scarcity. However, it also increases the volatility of digital commodities during economic shocks, which are often influenced by fiat monetary policies. Compared to stable fiat currencies, where real purchasing power of goods and services resides, this volatility undermines the digital commodities' ability to be a reliable store of value, thereby limiting their widespread acceptance.

Wholesale wCBDC

Outisde Assets

Reverse Repos

Pyhsical Cash/ rCBDC &Bank Reserves/ Deposits

Gov. + Private Securities

Loans

BANKING SYSTEM CONSOLIDATED BALANCE SHEET STRUCTURE

Tokenized Deposit Stablecoins

ASSETS

LIABILITIES

Traditional deposits:- FDIC Insured- Non-FDIC Insured

Capital/ Private Seigniorage

Repurchase (Repo) agreements

Digital Money IssuedDLT/ Blockchain

Profit made by the money issuer

Value created ex-nihilo by the issuer

Bank loans + Debt Securities

Equity Securities

Mortgages

Hover over boxes to expand info.

Tokenised deposit stablecoins are digital tokens that represent a deposit in a regular commercial bank (either fractionally reserved or narrow bank). They aim to keep a stable value, usually pegged to a currency like the USD. These stablecoins are different from fiat backed stablecoins because they either are bank deposits on a DLT/Blockchain or are backed by tokenised actual bank deposits. They offer a digital on-chain, often faster way to use traditional banking money.

Traditional Bank deposits are the money you keep in a bank account for safekeeping, easy access, or earning interest. These can be checking accounts for daily transactions, savings accounts for building up funds, or time deposits like CDs that lock in money for a set period for higher interest. These accounts are usually insured up to a certain limit by the deposit insurance scheme.

Repo agreements on the central bank's balance sheet are short-term loans where the central bank lends money to financial institutions, such as commercial banks, in exchange for collateral, usually government securities. The financial institutions agree to repurchase the collateral later, often the next day. Reverse repos are the opposite; the central bank borrows money and provides collateral. These tools help the central bank manage money supply and short-term interest rates.

Bank loans from other lenders or debt securities are ways banks get extra money to lend out to customers. The central bank's discount window lets banks borrow money quickly, often at a higher interest rate than the federal funds inter-bank market. Debt securities are like IOUs that banks issue to investors, promising to pay back with interest. These methods help banks have enough funds to meet customer needs.

Bank Equity Securities are shares of ownership in a bank. When you buy these shares, you become a part-owner of the bank and may receive dividends or see the share price fluctuate. These securities help banks raise money for operations and growth, and they offer investors a way to potentially earn returns on their investment.

Commercial bank private seigniorage is the profit a bank earns from creating new money through loans. When a bank lends out more money than it holds in deposits, it essentially creates new money. The interest earned on these loans, minus the interest paid on deposits, represents the bank's seigniorage or profit from money creation.

Bank reverse repos are short-term agreements where the bank temporarily sells securities, usually to investors, with a promise to buy them back later. These transactions help the bank manage its cash needs by turning securities into quick funds. Essentially, reverse repos are a way for banks to borrow money on a short-term basis.

Commercial bank loans are sums of money that banks lend to individuals or businesses, often for specific purposes like buying a car or expanding operations. When a bank issues a loan, it essentially creates new money by adding the loan amount to the borrower's account. This new money circulates in the economy and is expected to be paid back with interest over time.

Mortgages refer to the home loans that a bank has lent to homeowners. These loans are assets for the bank, as they earn interest over time. Essentially, when you get a mortgage to buy a house, the bank "holds" that loan, and you pay it back with interest, making it a valuable asset for the bank.

Check the previous level.

A wholesale wCBDC (Central Bank Digital Currency) is a digital form of money for payments settlement used only by financial institutions like commercial banks, not the general public. Issued by the central bank of a country, it's designed to make transactions between these institutions faster, more secure, and more efficient. Think of it as an exclusive digital currency for a privileged set of agents.

Outside assets are financial holdings that are not issued by financial institutions like banks. These can include things like gold, real estate, or even stocks and bonds. Essentially, they're investments that provide value and can be traded but aren't directly related to banking or money creation.

Government securities are loans to the government in the form of bonds (check previous level), considered very safe. Public securities are stocks and bonds from publicly-traded companies. Private securities come from companies not publicly traded. All are investment tools, offering various risk and return profiles. They represent ownership or loaned money, which can be traded or held for income.

Tokenized DepositStablecoins

Traditional Deposits

RWA/ tokenized

S/T Gov. Debt Securities

S/T Private Debt Securities

Other Assets

Yieldfrom assets

FIAT BACKED STABLECOIN ISSUER BALANCE SHEET STRUCTURE

Fiat-Backed Stablecoin tokens

ASSETS

LIABILITIES

Equity/ Private Seigniorage

Digital Money IssuedDLT/ Blockchain

Profit made by the money issuer

Brief Explainer

Hover over boxes to expand info.

The reserves include bank-issued deposits and may also consist of one or a combination of other assets.

In the Level L3 monetary tier, where fiat/cash-backed stablecoins often reside, the issuing entity creates a secured or collateralised liability that is backed 1:1 in market value by reserves. These reserves typically consist of assets issued from Level L1 (Central Bank) or Level L2 (the U.S. Banking System or Government), depending on the stablecoin issuer's access to these levels for payment settlement purposes. This tier is often associated with Eurodollars or deposits beyond the scope of U.S. regulations. Though there are yet no international standards, it is natural for the settlement of these stablecoins to be made with U.S. bank-issued liabilities (traditional deposits or tokenized deposits). Hence, it is convenient that stablecoin issuers maintain good access to the U.S. Banking System for accessing its backstop guarantees.

Tokenised deposit stablecoins are digital tokens that represent a deposit in a regular commercial bank. They aim to keep a stable value, usually pegged to a currency like the USD. These stablecoins are different from fiat backed stablecoins because they either are bank deposits on a DLT/Blockchain or are backed by tokenised actual bank deposits. They offer a digital on-chain, often faster way to use traditional banking money.

Traditional Bank deposits are the money you keep in a bank account for safekeeping, easy access, or earning interest. These can be checking accounts for daily transactions, savings accounts for building up funds, or time deposits like CDs that lock in money for a set period for higher interest. These accounts are usually insured up to a certain limit by the deposit insurance scheme.

Short-term government debt securities are loans to the government that last for a short period, usually less than a year. In exchange, you get a contract promising to pay you back with interest. These are considered low-risk investments because they're backed by the government with its taxation power. They're often used by investors as a safe place to park money for a short time.

Short-term private debt securities are loans to companies or financial institutions that must be paid back within a year. In return, you get a contract promising to repay you with interest. These are riskier than government securities, but they usually offer a risk premium. They're a way for investors to temporarily lend money to businesses.

Real World Assets (RWA) tokenised are various types of assets that have gone through the process of converting real-world assets, such as real estate, art, commodities or even issued securities into digital tokens that can be traded on a DLT/ blockchain. This makes it possible to buy, sell, and invest in these assets in a more efficient, transparent and accessible way, such as partitioning the share of these assets.

Yield from assets on a balance sheet is the income or profit generated from the asset holdings, often expressed as a percentage of the asset's value.

Equity or private seigniorage from a non-bank money issuer is the profit a company makes by issuing its own digital currency, like stablecoins. This profit comes from the difference between the non-distributed yield to stablecoin holders, earned on the assets backing the currency and the face value of the issued stablecoins or liabilities. It essentially acts as a form of company equity.

Fiat-backed stablecoins are digital tokens, with similarities to traditional e-money or money market fund shares, pegged to fiat currencies like the U.S. dollar. Each token backing corresponds to real money in a bank or financial custodian, sometimes outside the U.S., leading to "pseudo tokenised eurodollars." These stablecoins offer digital transactions without the usual cryptocurrency price swings.

OutsideAssets

CREDIT

CENTRAL BANK BALANCE SHEET STRUCTURE

FX Reserves & SDRs

Commercial Bank Loans

ASSETS

Gov. Securities

LIABILITIES

Private Debt/EquitySecurities

Digital Money IssuedDLT/ Blockchain

Repurchase (Repo) agreements

Profit made by the money issuer

Value created ex-nihilo by the issuer

Central BankLiquidity Swaps

Base MoneyM0

Retail rCBDC

A retail rCBDC (Central Bank Digital Currency) is like a digital version of cash issued by a country's central bank, being their direct liability. Unlike traditional money that you hold in your hand or in a bank account, a retail CBDC is electronic money you, end user, can use through a digital wallet. It's money backed by the government's delegated central bank in other words.

Wholesale wCBDC

A wholesale wCBDC (Central Bank Digital Currency) is a digital form of money for payments settlement used only by financial institutions like commercial banks, not the general public. Issued by the central bank of a country, it's designed to make transactions between these institutions faster, more secure, and more efficient. Think of it as an exclusive digital currency for a privileged set of agents.

Physical Cash

Bank Reserves/ Deposits

Capital/ Public Seigniorage

Gov. + Foreign Official Accounts

Reverse Repos

Commodities

Hover over boxes to expand info.

98.9% of total Assets:U.S. Federal Reserve System

Physical cash together with rCBDC are the only types of money you, end user, can hold—but physical cash are coins and paper bills issued by a country's central bank that someone can touch. Unlike digital money, physical cash doesn't require a bank account or electronic device to use. It's the most basic and direct way to carry out transactions, recognised and accepted almost everywhere in each domestic economy.

Bank reserves are funds that commercial banks keep at the central bank. Think of it like a special bank account that only banks have, but instead of spending it at the store, they use it to settle transactions with each other or meet regulatory requirements. These reserves are the backbone of a safe and smooth-running payment and financial systems, ensuring banks have enough money on hand for their day-to-day operations.

Reverse repos are short-term agreements where the central bank buys securities from financial institutions with a promise to sell them back later, usually the next day. It's like a one-night loan, where the central bank lends base money and takes securities as collateral. This tool helps the central bank control how much money is available in the financial system, which in turn affects interest rates and overall economic stability.

Government and foreign official accounts at the central bank are special accounts where government agencies and foreign central banks or governments (securities issuers at level 2) keep their base money. These accounts are secure and often used for large transactions, like paying for public projects or settling international trade. Here we could also account for the CB liquidity swaps liabilities.

Public seigniorage is the profit a central bank earns by issuing money. In modern systems where central banks pay interest on bank reserves, seigniorage is generated by the difference between the interest the central bank earns on its assets (like government bonds or bank loans) and the lower interest it pays on reserves or other liabilities held by commercial banks. This profit usually goes to the government and is a non-tax source of revenue.

Commodities are basic assets that can be bought, sold, or traded and are often used as building blocks in the production or issuance of other valuable assets. Examples include gold, oil, wheat, coffee or digital commodities like Bitcoin (BTC) and Radix (XRD). The most valued commodities are often scarce and not easily replicated by human intervention. Prices fluctuate based on supply and demand and are traded on specialised markets.

FX reserves are foreign currencies held by a country's central bank to stabilize their own currency and pay for imports. Special Drawing Rights (SDRs) are a type of international asset, created by the International Monetary Fund, that countries can use to bolster their FX reserves. Think of FX reserves as a country's financial safety net, and SDRs as a community fund that countries can dip into to strengthen that safety net. Both aim to provide financial stability and facilitate international trade.

Government securities are financial instruments issued by the government to raise funds, backed by the government's ability to tax its citizens. Types include Treasury Bills (short-term), Treasury Notes (medium-term), and Treasury Bonds (long-term). These are essentially loans made by investors or the central bank to the government, considered to be low-risk investments. When you buy one, you're lending money to the government in exchange for a promise to be paid back with interest at a later date. They are often used for saving, investing, and as a benchmark for other financial markets.

Private debt/equity securities are investment tools that allow you to lend money to or own a share of a private company. In debt securities like private bonds, the company agrees to pay you back with interest. In equity securities, you become a part-owner and may get dividends or a share of the company's profits. These investments are often higher-risk compared to government securities, but they can offer higher returns. They are a way for companies to raise funds and for investors to potentially earn more money.

Commercial bank loans from the central bank are special loans that commercial banks can take to increase their reserves (via the central bank's lending facility, Discount Window). These reserves enable commercial banks to lend more money to consumers and businesses, essentially creating new money in the economy. The central bank sets the interest rate on these loans, influencing how much new money is created and circulating. This process is a key part of how monetary policy impacts everyday life.

Repo agreements on the central bank's balance sheet are short-term loans where the central bank lends money to financial institutions in exchange for collateral, usually government securities. The financial institutions agree to repurchase the collateral later, often the next day. Reverse repos are the opposite; the central bank borrows money and provides collateral. These tools help the central bank manage money supply and short-term interest rates.

Central bank liquidity swaps are agreements between two central banks to exchange their currencies for a set period. This provides each bank with temporary access to the other's currency, helping to stabilize financial conditions. For example, a U.S. central bank might swap dollars for euros with the European Central Bank to ensure both have the currencies they need for short-term stability.