Back to Basics

The future of money looks remarkably like its ancient past. When our ancestors used cowrie shells for commerce thousands of years ago, they understood something fundamental: value could be represented by a token that everyone trusted. Today’s tokenization revolution brings this peer-to-peer simplicity into the digital age, but with profound implications for how we structure financial markets.

During my tenure at DEPFA Bank, where I built a $4 billion investment-grade synthetic asset book, I witnessed firsthand how financial innovation can transform markets. The structured credit derivatives we created – from first-to-default baskets to credit-linked notes – were early examples of how traditional assets could be repackaged and traded in new forms. Today’s tokenization takes this concept to its logical conclusion: any asset can become a programmable, instantly transferable digital token on a shared ledger.

The Promise of Atomic Settlement

Tokenization fundamentally addresses the settlement frictions that plague traditional markets. Having managed the restructuring of complex infrastructure facilities in Italy and French commercial real estate portfolios at FMS Wertmanagement, I experienced how settlement delays and counterparty risks compound complexity. A €180 million restructuring could take weeks to settle through multiple intermediaries, each adding cost and risk. Programmable ledgers offer atomic settlement – the simultaneous and instantaneous exchange of assets and payment. This isn’t merely faster; it eliminates entire categories of risk. J.P. Morgan estimates that immediate settlement could reduce asset management costs by a fifth. I can tell from experience in FMS Wertmanagement and MUFG that for institutions managing billions in assets, such efficiencies do represent transformational change.

Learning from History’s Cycles

Yet history offers cautionary parallels. The rise of privately issued stablecoins mirrors America’s chaotic Free Banking Era of the 19th century, when numerous private banks issued their own notes. These often failed to trade at par value, creating the very confusion that central banking was designed to solve. I for one have vivid memories of trying to implement meaningful regulatory compliance across multiple jurisdictions, when financial innovation without proper oversight tended to recreate problems we thought we’d solved – there was at least one Groundhog Day per week.

The composability of tokenized assets – their ability to be combined and reused in complex arrangements – offers immense potential. But having lived through the 2008 crisis in a bank that actually failed, when I witnessed firsthand how interconnected synthetic structures could amplify systemic risk, I recognize that innovation must be balanced with prudent risk management. The question isn’t whether to embrace tokenization, but how to harness its benefits while learning from past mistakes.

The Triangulation Dilemma

How do we account for something designed to be unaccountable? This paradox sits at the heart of cryptocurrency’s challenge to traditional financial systems. National income accounting relies on triangulation – the principle that expenditure, output, and income must balance. But cryptocurrencies, with their pseudonymous transactions and borderless nature, deliberately obscure these relationships.

In my role of (also) overseeing compliance at three different financial institutions, including a €100 million-plus-subsidiary lending to Ukrainian entities, I grappled regularly with the challenge of maintaining (or actually, rather establishing first) transparency in opaque markets. However, the tools we developed for FATCA and OFAC compliance pale in comparison to the complexity of tracking crypto flows. When Binance’s revenues reached $16.8 billion in 2024, surpassing many nations‘ GDP, the question became urgent: is this economic activity or something else entirely?

Value Creation or Value Destruction?

Tim Congdon’s provocative argument – that cryptocurrencies actively destroy value by enabling money laundering – resonates with my experience implementing antimoney laundering policies across multiple jurisdictions. When managing regulatory relationships with BaFin and the Bundesbank, I observed how traditional banking’s elaborate compliance infrastructure serves a dual purpose: preventing illicit flows while creating auditable records for national accounting (and, importantly, showcasing Compliance activity which too often is becoming the chief motif, never mind purpose and efficacy). Window-dressing? Never heard of it…

Crypto mining inflates this accounting challenge – not with hot air but with inflammable gas. For instance, does the electricity consumed by Crypto mining constitute capital formation, as some economists seriously propose? I am not a novice to alternative assets – I have structured weather risk derivatives and catastrophe bonds. I think that I understand how alternative assets can serve legitimate investment purposes. But crypto’s energy consumption produces no tangible output beyond maintaining the network itself – a circular logic that confounds traditional economic measurement. I have worked for a failed bank – and I can tell you that right up until the moment when ‘[our assets] hit the fan’, auditors had no clue about the real risks and how they would compound each other. Proper and clairvoyant accounting should complement prudent and knowledgeable finance – both at institutional and regulatory levels.

Regulatory Shadows

Kenneth Rogoff estimates the global informal economy at $20 trillion – nearly a fifth of world GDP. Cryptocurrencies have become the digital manifestation of this shadow economy. While conducting compliance audits and implementing MiFID II requirements, I learned that effective regulation requires not just rules but the ability to observe and measure. Crypto’s opacity makes both nearly impossible.

The Venezuelan example is instructive. Maduro’s regime uses crypto to circumvent sanctions while citizens use it to escape hyperinflation. This duality – liberation and lawlessness – defines crypto’s relationship with traditional finance. Having managed assets through multiple financial crises, I recognize that systems designed to evade oversight inevitably attract both the desperate and the criminal. The challenge for policymakers is distinguishing between the two while maintaining financial stability.

The Illusion of Decentralization

Crypto’s foundational promise was eliminating intermediaries. The reality? It created new, less-regulated ones. Centralized exchanges like Binance and Coinbase dominate trading. Tether and Circle control stablecoin issuance. Even ‚Decentralized Finance‚ or ‘DeFi’ relies on user-friendly interfaces that become de facto centralization points. After years of navigating the regulatory requirements of traditional finance across Germany, the UK and Ireland, I find it ironic that crypto has essentially recreated the banking system – just without the safeguards.

During my time restructuring operations at MUFG Germany as part of an EU bank, which is part and parcel of an EMEA-wide operation which in turn is reliant on a global operation headquartered in Tokyo (think of a Russian doll), I learned that true decentralization is extraordinarily difficult to achieve even within a single organization. Every attempt to distribute decision-making creates coordination challenges that naturally lead back to centralization. Crypto faces the same forces, but without the governance structures that traditional finance developed over centuries.

India’s Alternative Path

The real payments revolution isn’t happening in crypto – it’s occurring through government-led initiatives like India’s UPI, processing 19 billion transactions monthly. From my own experience of creating a $300 million SEBI-approved investment vehicle for Indian securities, I can attest to India’s capacity for financial innovation within regulatory frameworks. UPI succeeded because it leveraged existing banking infrastructure while fostering competition through interoperability.

This contrasts sharply with crypto’s approach. Where UPI built bridges between existing institutions, crypto attempted to bypass them entirely. In my experience, successful – and that definition includes the characteristics of reliability in all kinds of financial weather – financial innovation requires integration, not isolation. Systems that ignore this principle inevitably develop their own intermediaries – often less transparent and accountable than those they sought to replace.

The Compliance-by-Design Solution

Zero-knowledge proofs (“ZKP”) offer a path forward, enabling privacy without sacrificing compliance. Users could prove they meet regulatory requirements without revealing their identity to the network. This is crucial with regard to the complications (I am not judging here) brought about by the GDPR and its often-pseudo-religious interpretation. I hence appreciate the elegance of this ZKP-solution. It preserves individual privacy while maintaining the system-wide transparency regulators require.

Yet, implementation remains challenging. I have learned that theoretical solutions often founder on practical realities. The infrastructure for compliance-by-design exists, but adoption requires cooperation between traditionally adversarial parties: crypto advocates and regulators. Building such bridges by the way demands the management philosophy I’ve long advocated: Knowledge to understand the technology, Reason to balance competing interests, and Purpose to serve legitimate financial needs while preventing abuse.

When Innovation Amplifies Risk

Risk doesn’t disappear – it migrates. After 2008, regulators successfully fortified banks, but risk shifted to less-regulated entities: asset managers, ETFs, and now stablecoin issuers. These new liquidity providers share a critical vulnerability I witnessed in my organisation during the onset of the financial crisis: liquidity mismatch. They promise instant redemption while investing in assets that become illiquid precisely when redemptions spike.

Managing structured assets during the financial crisis taught me that complexity and speed create a dangerous combination. Tokenization accelerates both. Atomic settlement eliminates certain risks but amplifies others. When markets move at digital speed, traditional circuit breakers fail. Flash crashes become more severe. Shock transmission accelerates beyond policymakers‘ ability to respond. Atomic settlement may reduce operational risk, if such settlement is consistently, seamlessly and entirely part of an AI powered but checked process flow. In any event, risk management frameworks designed for human-speed markets struggle with algorithmic velocity.

The Fragility of Composability

Decentralised Finance’s – DeFi’s – composability – the ability to combine protocols like Lego blocks – mirrors the structured products that amplified the 2008 crisis. I remember to have built synthetic CDOs that seemed robust individually but proved catastrophically interconnected. Today’s composed DeFi products exhibit similar characteristics: innovation that appears to reduce risk while actually concentrating it.

For instance, a €600 million healthcare receivables monetization I structured in Italy required understanding of every link in the chain. One weak connection could cascade through the entire structure. DeFi faces identical challenges but without the documentation standards and legal frameworks that traditional finance developed through painful experience. Smart contracts may execute flawlessly, but they can’t adjudicate disputes or adapt to unforeseen circumstances.

Building Non-Fragile Systems

Even when implementing transformational change – reducing costs while improving risk management – the effort taught me that resilience requires redundancy. Fast, efficient systems are often fragile. Tokenization’s efficiency gains must be balanced against systemic stability. This means accepting some friction to prevent cascading failures.

Effective oversight demands understanding both the technology and its failure modes. Prescriptive rules, from EMIR to MiFID II, can’t anticipate every innovation. Instead, we need principles-based regulation that adapts to technological change while maintaining core protections. The alternative – waiting for the next crisis to reveal systemic vulnerabilities – is a luxury we can’t afford.

Integration, Not Revolution

Good organizations are like bridges – connecting people with purposes, customers with services, divisions with goals. The same principle applies to financial innovation. Successful transformation doesn’t destroy existing structures; it builds connections between old and new. I am sure that Mr Schumpeter would understand. Analysing the transition from traditional banking to digital operations shows that revolutionary rhetoric often masks evolutionary reality.

The path forward does not lie in choosing between traditional finance and crypto, but in thoughtful integration. Central Bank Digital Currencies represent one bridge, combining crypto’s efficiency with monetary policy tools. Regulated stablecoins offer another, providing digital utility within established frameworks. It is said that successful transformation requires identifying what to preserve alongside what to change. This sounds logical but it is much harder to assess and implement in practice.

The Unified Ledger Vision

Tokenization’s true potential lies in creating unified ledgers where assets and money coexist on programmable platforms. Imagine collateral management, margining, and settlement occurring simultaneously and automatically. I recognize the transformational potential. But realization requires more than technology – it demands legal harmonization, operational standards, and trust between participants.

Innovation succeeds when it solves real problems within existing frameworks. The mechanisms get accepted if and only because they met regulatory requirements while improving efficiency. Digital finance must follow the same path: innovation that enhances rather than evades oversight.

Purpose-Driven Transformation

If you have read the introduction on my website’s homepage, you know that I took some inspiration from the Roman senate’s emergency decree – reminding the two consuls then vested with almost dictatorial powers that with great power comes great responsibility. Digital finance offers unprecedented capabilities, but these must serve legitimate purposes. Having witnessed both innovation’s promise and its perils across three major financial institutions, I believe that successful transformation requires clear purpose: improving financial access, reducing systemic risk, and serving real economic needs.

The future of money isn’t about choosing sides between traditional and digital finance. It’s about building bridges that connect innovation with stability, efficiency with resilience, privacy with transparency. Forgive me for sounding repetitive but this requires the management philosophy I keep referring to: Knowledge to understand complex systems, Reason to balance competing demands, and Purpose to ensure finance serves society rather than the reverse. I appreciate the role of self-serving, get-rich-quick instincts and defence or domination reflexes. I have made intense acquaintance with them, ‘details available upon request. These personal interests may not be legitimate, but they are real. The art is to channel and control or ‘align’ them through careful design of processes and positions so that they are not jeopardising the overall purpose of finance.

As we stand at this inflection point, the question isn’t whether digital transformation will reshape finance – it’s whether we’ll guide that transformation wisely. The lessons from past crises, combined with today’s technological capabilities, offer an unprecedented opportunity to build a more efficient, inclusive, and stable financial system. But success demands that we learn from history while embracing innovation, maintaining the bridges between past wisdom and future possibility.