The Cash Leg of Tokenisation

Why settlement, not assets, defines the regulatory limits of tokenised markets

Discussions of tokenisation tend to focus on the representation of assets: securities issued as tokens, fund units recorded on distributed ledgers, or real-world assets mirrored on-chain. In regulatory analysis, however, the decisive question lies elsewhere. Markets do not succeed or fail on the asset leg alone. They succeed or fail on settlement.

The “cash leg” of a transaction determines whether settlement is final, whether counterparty risk is extinguished, and whether obligations survive insolvency. It is therefore the point at which tokenisation intersects most directly with payment law, prudential regulation, and financial stability. This explains a consistent pattern across tokenisation pilots globally: assets move on-chain early; cash does not.

This asymmetry is not a technological limitation. It is a legal and institutional one.

Off-chain cash: the deliberate conservatism of current models

The most common settlement model in tokenised markets today keeps cash entirely off-chain.  Tokenised assets are issued, transferred, or redeemed on distributed ledgers, while payments occur through conventional banking and payment systems.

In 2023, Siemens issued a €60 million digital bond on a public blockchain, with the asset transfer completed on-chain while payment was settled via traditional bank transfer over two days. The transaction demonstrated that tokenised issuance can function within existing payment law, even if it temporarily preserves settlement latency.

From a regulatory perspective, this model is uncontroversial. Cash movements remain subject to established payment systems, settlement finality rules, and insolvency protections. The legal nature of money does not change, and the allocation of risk is well understood.

What is often overlooked is that this model is not a temporary compromise. It reflects a conscious regulatory judgement that asset representation can innovate independently of settlement. Tokenisation in this form improves transparency and operational coordination, but it does not rewire the monetary layer of the financial system. From a supervisory perspective, this outcome confirms that early tokenisation gains can be realised without altering the legal mechanics of money or settlement finality.

The limitation is equally clear. Without a tokenised settlement asset, delivery-versus-payment remains operational rather than legal. Settlement risk is reduced, but not eliminated. For many regulators, this is an acceptable trade-off at the current stage of market development.

Tokenised deposits: programmable bank money and its implications

A more ambitious approach brings commercial bank money onto the ledger in the form of tokenised deposits. In this model, banks issue digital representations of deposits that remain claims on the issuing institution, but can circulate and settle transactions on-chain.

Legally, this raises difficult questions. A deposit is not just a balance; it is a regulated liability with prudential treatment, depositor protection implications, and resolution consequences. Tokenising that liability does not change its legal nature, but it changes its behaviour.

Once deposits become transferable and programmable within market infrastructure, traditional boundaries between banking, payments, and securities settlement begin to blur. Interbank settlement risk may be reduced within closed systems, but concentration risk and interoperability challenges increase. The question for regulators is not whether this model is feasible, but whether it scales safely beyond tightly controlled environments.

As a result, tokenised deposits are being explored cautiously, typically within restricted networks and under close supervisory engagement.

Practical experimentation with tokenised deposits has so far been confined to closed, institutionally controlled environments. In 2024, UBS successfully piloted its “UBS Digital Cash” solution, executing domestic and cross-border payments in CHF, USD, EUR, and CNY, including intragroup liquidity transfers. In parallel, a joint pilot involving Deutsche Bank and UBS demonstrated atomic settlement between tokenised deposit balances and TARGET2 central bank money, highlighting how programmable commercial bank money can integrate with existing settlement infrastructure without displacing it.

Stablecoins as settlement assets: private money at the core of market infrastructure

Stablecoins are often presented as a ready-made solution to the cash leg problem. They enable near-instant settlement and make atomic delivery-versus-payment technically possible. For market participants, they offer speed and composability. For regulators, they raise fundamental concerns. Stablecoins are not money in the legal sense. They are private instruments whose value depends on reserve management, redemption mechanisms, and issuer governance. Using them as settlement assets shifts settlement risk away from payment systems and toward issuer balance sheets.

This has profound implications. Settlement finality becomes contingent on the solvency and liquidity of the stablecoin issuer. Monetary sovereignty, consumer protection, and systemic risk management all come into play. These concerns explain why regulators have consistently resisted the use of stablecoins as settlement assets in regulated securities and fund markets, even where their technical advantages are clear.

The issue is not innovation aversion. It is the recognition that settlement assets are part of the monetary order, not merely a technical input. For much of the past decade, stablecoins were treated by regulators as fundamentally unsuitable for use as a settlement asset in regulated markets.

Recent regulatory developments have begun to shift this assessment, cautiously and conditionally. In the European Union, the MiCAR introduces the category of e-money tokens which brings qualifying euro-denominated stablecoins within the perimeter of payments regulation, reducing the legal uncertainty that previously made their institutional use untenable. In parallel, the Eurosystem has acknowledged the “cash gap” in tokenised transactions and has taken steps to modernise settlement infrastructure, including experiments linking DLT platforms to TARGET services and a gradual opening of payment systems to a broader range of regulated payment service providers. While these initiatives do not place stablecoins on the same footing as central bank money, they signal a willingness to accommodate new settlement models under controlled conditions.

The shift toward conditional acceptance of stablecoins is already visible in European market practice. Regulated euro-denominated stablecoins are increasingly positioned for institutional settlement use, including bond issuance and corporate payments. Notably, Société Générale‑Forge has issued euro stablecoins explicitly designed to support on-chain bond settlement within a regulated perimeter.

Central bank money: the cleanest solution, and the most constrained

From a legal standpoint, central bank money is the ideal settlement asset. It carries no credit risk, provides unquestioned finality, and sits at the core of existing settlement systems. Tokenised central bank money would, in theory, enable true atomic settlement on distributed ledgers.

In practice, this model remains largely aspirational. Extending central bank money into tokenised market infrastructure raises issues that go far beyond market efficiency: access criteria, monetary policy transmission, cross-border settlement, and governance of shared infrastructure.

Central banks have therefore approached this space incrementally, focusing on wholesale experiments and tightly scoped pilots. The regulatory message is clear. While central bank money may ultimately anchor tokenised settlement, it cannot be introduced casually or rapidly without rethinking core aspects of financial system design.

This incremental approach is reflected in recent Eurosystem pilots. In 2024, Bundesbank enabled the settlement of a €300 million blockchain-based bond issued by Siemens using its “Trigger” mechanism, synchronising on-chain asset transfer with cash movement in TARGET2. Settlement time was reduced from T+2 to seconds, while legal finality remained anchored in central bank money.

Hybrid and layered models: pragmatism over purity

Between these models lies a growing category of hybrid approaches. These include pre-funded cash accounts, netted settlement cycles, and periodic reconciliation mechanisms that approximate atomicity without changing the legal nature of money.

From a policy perspective, these models are attractive precisely because they respect existing payment law while allowing tokenisation to progress. They do not claim to eliminate settlement risk entirely. Instead, they manage it within familiar legal frameworks.

This pragmatism explains why many successful tokenisation pilots rely on layered settlement structures rather than end-to-end on-chain money. The objective is not theoretical elegance, but legal certainty.

Conclusion: the cash leg as the boundary of tokenisation

Taken together, these models illustrate a central truth about tokenisation. The asset leg challenges market infrastructure. The cash leg challenges monetary architecture.

Regulators have shown a clear willingness to accommodate innovation in asset representation. They have been far more cautious where tokenisation touches money, payments, and settlement finality. This is not an inconsistency. It reflects the fact that cash is not merely another asset. It is a public good, a policy instrument, and a cornerstone of financial stability.

For tokenisation to mature, it does not need to solve the cash leg immediately. It needs to respect its legal gravity. The most durable models are therefore likely to be those that separate innovation in representation from transformation of settlement, advancing each at a pace that the law, and the financial system, can absorb.

In this sense, the future of tokenised markets will be shaped less by how quickly assets move on-chain, and more by how carefully the cash leg is designed.