The “future of money” conversation is often framed like a winner-takes-all battle: central banks on one side, crypto on the other. A BIS working paper – Competing digital monies by Frost et al. – takes a more useful approach. Instead of treating stablecoins and platform tokens as strange exceptions, the paper places them in the same economic arena as bank deposits and potential central bank digital currencies (CBDCs). For anyone watching digital assets closely, that framing matters: it implicitly acknowledges private digital tokens as a real monetary instrument – one that can, under certain conditions, support trade and improve welfare.
The “Walled Garden” Problem: A Use Case for Crypto
In the model, the economy is split between offline commerce (where banks dominate) and online markets (where platforms run the show). The main friction is what the authors describe as a “walled garden”: money that works well inside one system but doesn’t move smoothly across systems. When value gets stuck in closed loops, activity is constrained – even if there is demand on the other side.This maps neatly onto a problem crypto has been trying to address for years. Traditional arrangements often force a trade-off: banks give you broad acceptance, while apps give you ease of use – yet interoperability is limited. By design, blockchain-based assets and stablecoins aim to move across networks and borders with fewer handoffs. The paper’s logic suggests that if payment systems remain fragmented and non-interoperable, trade stays inefficiently low. Break those walls, and you expand the set of feasible transactions – unlocking value that closed networks leave behind.
Why a Retail CBDC Might Be Redundant
One of the more striking takeaways is the paper’s treatment of public payment infrastructure. The authors find an “equivalence” between a retail CBDC and a fast payment system (FPS). In plain terms: if payment rails are strong enough to connect systems and enable smooth transfers, then issuing a retail CBDC may not change outcomes much compared to simply upgrading interoperability.
Under the hood, the paper builds a clean theoretical model that blends two-sided market theory with payment economics. It extends the classic frameworks of Armstrong (2006), Rochet and Tirole (2006), and Verdier (2024), then lets a bank and a digital platform compete in a game set on a Hotelling line – think “physical” preferences at one end and “digital” at the other. With that setup, the authors solve for equilibrium outcomes like merchant fees, market coverage, and social welfare under walled gardens, an FPS, and a CBDC, across different policy and market setups.
Disintermediation as a Driver of Welfare
Regulators frequently worry that stablecoins will trigger “disintermediation” – pulling deposits away from banks. The BIS paper engages directly with that concern, but the conclusion is more nuanced than the typical fear-based narrative. Even if banks lose some market share to non-bank digital providers (including platforms), overall welfare can rise.In the framework, new entrants push markets toward openness: participation improves, exclusion declines, and trade expands. Banks don’t disappear; they face competition and respond – often by adjusting pricing such as merchant fees. From a crypto-industry perspective, this is a useful reframing. Disintermediation isn’t automatically a threat to stability; in the model, it can function as a channel through which access broadens and markets become more contestable.
The Path Forward for Stablecoins
If there’s a strategy embedded in the BIS logic, it’s connectivity. The “best” outcome in the paper is an economy where offline and online sales can both thrive, supported by systems that interoperate rather than trap value. Stablecoins sit naturally in that gap. Bank deposits are tied to specific institutions. Platform tokens may be limited to specific ecosystems. A well-structured stablecoin, in contrast, can operate as a neutral bridge – usable across different digital venues while still linking to real-economy payments. In other words, their edge is not just speed or novelty; it’s the ability to move value across contexts without friction.
Bottom Line
Competing digital monies subtly shifts the conversation in a way that should matter to the digital asset sector. The end goal, as the paper sets it up, isn’t necessarily a state-issued coin for every retail user – it’s a market structure where money can move freely across systems.If public policy focuses on breaking down interoperability barriers, that creates space for private innovation to compete on usefulness rather than captive networks. In that world, stablecoins and crypto-aligned products are not merely speculative instruments – they become practical tools for commerce in an economy that is increasingly digital and interconnected.