In today’s rapidly evolving financial landscape, understanding the different forms of means of exchange usually referred to as “money” and their respective utilities, risks, and values is more important than ever. As we navigate the digital age, the lines between traditional banking, stablecoins, and cryptocurrencies continue to blur, each offering unique advantages and challenges. This article explores these three pillars of modern finance—money in banks, fiat-backed stablecoins like AUDD, and cryptocurrencies like Bitcoin—by comparing their characteristics, underlying technologies, and the roles they play in our economy.

What is Money in Banks?

Money in banks, often referred to as deposits, is the cornerstone of our economic system. In the digital era, most transactions are conducted electronically, making physical cash less relevant in everyday use. Bank deposits are essentially loans from depositors to the bank, which the bank uses to provide loans and other financial services. The fungibility of deposits across the banking system enables deposits to be turned into money. The stability and fungibility of bank money are underpinned by regulated capital requirements, which act as a buffer against potential losses. These regulations ensure that even if a bank faces financial difficulties, the deposits remain secure—albeit at a cost passed on to borrowers and other users of the payment system.

However, the traditional banking system is not without its inefficiencies. High transaction fees, especially for international payments, and the time delays inherent in the settlement process can make bank money less efficient for certain transactions. Although highly regulated, banks are not fully transparent on the risk carried on the balance sheet. Additionally, banks’ central role in money creation means that they have significant control over the money supply, which can have broad economic implications.

Enter Stablecoins: A Bridge Between Traditional Finance and Cryptocurrency

Stablecoins are digital assets that combine the stability of traditional money with the efficiency of blockchain technology. Unlike cryptocurrencies, which are known for their volatility, stablecoins are pegged to the value of an asset such as a fiat currency or a commodity. Or stable coins could be pegged by an algorithm that determines the amount of coins minted or burned thereby maintaining a stable value.
AUDD is pegged to the Australian Dollar (AUD)—and is backed by AUD high-value liquid assets (HVLAs). HVLAs are defined in regulation and include assets such as government securities and other low-risk securities. This 1:1 direct backing ensures that the value of an AUDD remains equivalent to an AUD, providing users with a stable and reliable means of exchange.

Stablecoins like AUDD, can offer advantages over traditional bank money, particularly in terms of cost, transparency, and efficiency. With minimal regulation compared to banks, fiat currency-backed stablecoins can facilitate low-cost, instantaneous cross-border transactions, making them an attractive alternative for those looking to hold and transfer value outside the traditional banking system. Moreover, because stablecoins are built on blockchain technology, they benefit from enhanced security, transparency, and immutability, which are critical for maintaining user trust. The limit on the number of Stablecoins that can be issued is only constrained by demand and the availability of HVLAs.

Cryptocurrencies: A High-Risk, High-Reward Financial Frontier

The amount of cryptocurrency that can be issued is limited by a fixed formula or an issuance target. The limitation is a significant difference between money in banks and stablecoins that are only limited by demand.

However, the lack of asset backing and regulatory oversight makes cryptocurrencies inherently risky. Their value is subject to the whims of the market, and their use in black market transactions has tarnished their reputation. Despite these challenges, cryptocurrencies have found a niche as a store of value in countries with unstable fiat currencies and among investors seeking to diversify their portfolios.

Comparing the Three: Utility, Risk, and Value

– Utility: Bank money is highly liquid and universally accepted, making it the most practical for everyday transactions. Stablecoins offer similar utility, with the added benefits of lower costs and faster transaction times. Cryptocurrencies, while less practical for day-to-day use due to their volatility, offer unique opportunities for investment and wealth preservation.

– Risk: Bank deposits are generally considered low-risk due to government support and regulatory safeguards. Stablecoins are also low-risk, thanks to their direct asset backing and the security provided by blockchain technology. Cryptocurrencies, on the other hand, are high-risk due to their market volatility and lack of regulation.

– Value: The value of bank money is stable, as it is tied directly to the national currency. Stablecoins maintain a stable value through their 1:1 peg to fiat currency, while cryptocurrencies are subject to significant fluctuations in value based on market conditions.

The Future of Money: A Converging Landscape

As digital finance continues to evolve, we are likely to see an increasing convergence between these three forms of money. Regulation may force banks to begin to adopt blockchain technology to improve the efficiency and transparency of their operations, while stablecoins could see greater regulatory oversight on asset backing and capital requirements, bringing them closer to traditional financial products. Cryptocurrencies, despite their risks, will continue to play a role in the financial ecosystem, particularly as a tool for investment and value storage.

Understanding the differences and similarities between money in banks, stablecoins, and cryptocurrencies is crucial for navigating the modern financial landscape. Each offers unique benefits and challenges, and the right choice depends on your specific needs and risk tolerance. As these forms of money continue to develop, they will shape the future of finance in ways we are only beginning to understand.