Building the institutional digital money stack: What technical work still needs to be done?

Digital money is edging ever closer to mainstream and institutional adoption, however there is still a significant amount of building work needed in terms of what sits underneath a production-grade form of regulated digital money. As the industry moves from policy announcements and pilots to large-scale production, several questions remain.

For example, will the industry converge around common architecture or will we see multiple competing stacks emerge in the coming years? Will there be an element of interoperability between the different forms of digital money – form stablecoins to tokenised deposits – or will participants have to develop different systems for each one? How can new digital money platforms be integrated with existing payment, treasury and capital market infrastructure, in which substantial investment has already been made? And how will emerging technologies impact these developments?

THE STABLECOIN STACK

There are numerous interpretations of what constitutes the stablecoin stack. According to Kevin Lehtiniitty, CEO at stablecoin payments network Borderless.xyz, there are five layers – the asset layer otherwise known as the stablecoin itself, and then the custody or digital wallet layer. Both of these layers are relatively well developed. Stablecoins now have a regulatory framework behind them, be that the Genius Act in the US or the Markets in Crypto Assets (MiCA) regulation in the EU. Meanwhile, the custody level is equally welldeveloped with a number of standalone crypto custodians as well as the crop of digital assets subsidiaries of the major global custodians.

The onramps and offramps make up the next layer of the ecosystem. And here is where the maturity level becomes more uneven, says Lehtiniitty. “While moving stablecoin between a wallet is quite commoditised, delivering it as local currency in a recipient’s bank account, with different rails, licenses is the job and varies by corridor/markets,” she says. “Coverage is broad now, and the depth in any one market depends entirely on the local provider carrying it.”

The compliance layer comes next, addressing KYC requirements. And while travel rule messaging and screening both work effectively, institutions still complete KYC separately with each counterparty, says Lehtiniitty. “Identity portability, where a customer is verified once and attested across providers, is only starting to appear.”

Privacy is the final and possibly leastdeveloped in layer in the stablecoin stack, says Lehtiniitty. “Institutions need transaction confidentiality from competitors while regulators need full visibility. Almost nothing in production resolves that tension well today,” he says.

Institutions have made substantial investments in existing payments infrastructure, so ensuring new digital money platforms are well integrated without causing unnecessary operational complexity will be important, says Lehtiniitty. The new platforms should be treated as another rail behind existing systems rather than a parallel operation. “The failure mode I see most often is the ‘crypto desk’ pattern: separate team, separate ledger, separate reconciliation, separate compliance workflow. Six months later operational complexity has doubled and finance is exporting CSVs from five dashboards to close the books.”

The integrations that work do three things, says Lehtiniitty. “They present the new rail through the same API surface and data model as existing payment types, so treasury systems route to it the way they route to a wire or an instant payment. They consolidate every transaction into one ledger, so reconciliation stays a single process. And they keep counterparty changes as configuration rather than engineering, because the provider landscape underneath will keep shifting and you don’t want each shift to be a project.”

As digital money networks scale, there are technology challenges that deserve greater attention, says Lehtiniitty. “The industry’s attention has been hitherto focused on the exotic risks, smart contracts and custody, which are by now reasonably well-served. The failures that actually hurt institutions in production are typically on the fiat leg and more mundane. For example, a provider degrades without announcing it, a corridor’s rejection rate creeps up over a week, a maintenance window swallows a payroll run.”

Industry attention should instead be on the infrastructure and operational scaffolding that card schemes spent decades building, says Lehtiniitty. “There are no shared standards for measuring or disclosing reliability, so every institution assesses the same counterparties from scratch. A crossborder payment traverses a chain of parties with no common tooling or escalation path, so when a leg fails the diagnosis travels by email. And institutions used to one bank per market now need redundancy as a design principle, which changes how you architect and how you contract. Underneath all of it is concentration risk. An ecosystem where volume clusters on two issuers and a handful of providers has single points of failure it isn’t pricing yet.”

Lehtiniitty believes the future of interoperability and the connective tissue of the market relies on credible neutrality instead of walled gardens. A network owned by an issuer will favour its coin; one owned by a liquidity provider will favour its own book. The layer that routes between them can’t be a side project of someone with misaligned incentives, any more than a stock exchange should be owned by its largest trader.

That gives independent technology providers a few things to work towards, says Lehtiniitty. “Firstly, it is setting standards in production, because whoever connects to the most counterparties works out the practical data models first, and that’s usually what formal bodies end up standardizing. Secondly, it is about publishing the data, because nobody can compare pricing, speed or failure rates today, and the providers benefiting from that opacity aren’t going to fix it. Banks and financial market infrastructures bring the trust, the licenses, and the distribution; independent infrastructure keeps the connective layer honest. The ecosystem needs them separate.”

LIQUIDITY MANAGEMENT

The big gap in the digital money ecosystem is liquidity management, says Julio Faura, co-founder and CEO of Adhara, a UK-based provider of treasury and transaction services for digital assets. Faura. “To make payments, you have to source liquidity. The way that is done today, it is quite manual and you don’t have real-time visibility of liquidity sources. Precisely the benefit of digital cash is that it is real-time but you need to have intra-day liquidity management in order to meet settlement obligations. It is not just the tools that are missing, it is the internal processes.”

Standardisation is always a key consideration when building new ecosystems and Faura has seen big changes in recent years with a move towards a variety of standards for basic processes and interfaces rather than one de facto framework and the concerns that may bring over monopolies and systemic risks. “Around 2018 there were a small number of companies trying to own the whole market – the likes of Ripple and R3. We insisted that the industry can’t be controlled by one provider. So I don’t think that market structure will change,” says Faura. “There have been a number of pilots in the digital assets world and while these pilots are helpful in terms of exploring the implications, the market needs real integration and that requires standardised formats. Standards make things more efficient, faster, cheaper, less risky,” says Faura.

The question is how fart standardisation should go and whether there is a need for a market-wide utility rather than the multiple standards that tend to crop up in the initial stages of any developing ecosystem? There are instances where a utility approach or a multilateral orchestration scheme could work, says Faura. For example, the interbank settlement process requires a multilateral payment system so that banks can transact with each other. It also requires more development on the tooling needed to work with banks’ existing technology stacks. “Some of these external platforms do it all but it is unlikely that banks will accept a Web3 developer wholly controlled by a third party. You have to develop a stack that can work with banks’ own systems and security policies,” says Faura.

However, this brings additional complexities given that banks’ legacy systems are the cause of the biggest bottlenecks in the digital assets market, says Faura. “Many banks still have old monolithic systems and that makes the orchestration process very difficult. Some banks are in the process of modernising their core banking systems. But very few banks are advanced enough to do that, even the ones that would consider themselves modern.”

Part of the difficulty is in building the business case. “Many banks have begun to modernise their systems and others are waiting,” says Faura. “However, it can be hard to get the necessary funding for what is a long-term process with a return-on-investment some way into the future. In contrast, something like liquidity management promises instant savings. You also need to build the business case for the integration that is needed.”

Cross-border payment remains the main use case for proving the value of digital money, says Faura. “If we are doing all of this just to improve domestic payment systems, it is not enough to justify the investment.” And much of that investment will be focused on standardisation. “A lot of synchronisation is needed for crossborder payments and that is hard to do if you have multiple systems,” says Faura. There are different cycles involved in cross-border payments which will require smart contracts in order to operate with transparency. So, what should the role be of the many providers in the digital money ecosystem? It should primarily be to help the regulated entities rather than the so-called ‘disruption’ that is sometimes associated with new technology developments like digital money, says Faura.

“You see some providers try and get in the way of this. The system has been working for many years for AML and CTF. Be providers to regulated entities. Provide technical solutions, be practical and sensitive to those payment providers,” says Faura. “In the real banking world, we are less interested in disrupting the system. We are focused on removing the possibility of errors which are a significant cost and a big problem for clients who want certainty rather than speed when it comes to payments.”

BUILDING BLOCKS

According to Alexander Hoeptner, chief executive of European stablecoin issuer, AllUnity, there are four rails to the digital money technology stack and they all need to work: regulated issuance, custody infrastructure, settlement rails, and on/off ramps into the traditional banking system.

“Regulated issuance is the most developed,” says Hoeptner. “The EU’s Markets in Crypto Assets (MiCA) regulation has given Europe a clear framework. Custody is catching up fast, with Clearstream and major custodians now offering qualified digital asset custody. Settlement rails are functional but not yet at scale. The weakest link remains the on/off ramp layer and wallet infrastructure. That’s the next frontier.”

In addition to addressing wallet infrastructure, interoperability between different forms of digital money will also be important if institutional market participants are going to reap the benefits on offer, says Hoeptner. “A world where regulated stablecoins, tokenised deposits, wholesale CBDCs and commercial bank money cannot move seamlessly between each other is a world where the efficiency gains of digital money never fully materialise. Interoperability is fundamental to creating a truly efficient digital money ecosystem.

“The main challenges are around common standards, connectivity between networks, regulatory alignment, and ensuring secure, compliant settlement across different infrastructures. As a European stablecoin issuer, we see regulated stablecoins as a key enabler of more efficient global payments, particularly for cross-border transactions,” says Hoeptner

Cross-border payments remain one of the industry’s biggest problems, says Hoeptner. “The current crossborder payment system is a chain of correspondent banks, each adding cost, delay and opacity. A mature digital money stack collapses that chain entirely. With regulated stablecoins operating 24/7 across borders, a payment that today takes two days and passes through three intermediaries can settle in seconds with full auditability and no cut-off times.”

The liquidity management implications are equally significant, says Hoeptner. “Treasuries no longer need to pre-fund accounts in every currency jurisdiction, because digital money moves faster than the need to hold buffers. This is not a distant vision. We are already seeing early versions of this where stablecoins are being used for crossborder institutional settlement. The infrastructure exists. What we need now is scale, standardisation, and the courage of institutions to commit to production.”

Of course, emerging technologies such as confidential computing, digital identity, zero-knowledge proofs or quantum-resistant cryptography will all impact the digital money stack. But, according to Hoeptner, the biggest impact will come from the convergence of AI and trusted digital money infrastructure.

“AI-driven agentic payments will require a secure, programmable settlement layer, and regulated stablecoins can provide that foundation by enabling fast, transparent, and compliant transactions. Technologies like digital identity, confidential computing, zero-knowledge proofs, and quantumresistant cryptography will further strengthen security, privacy, and trust as the digital money ecosystem evolves.”

INTEROPERABILITY

Another important dynamic in these formative stages, and especially so in an institutional context, is the separation of proof-of-concepts from infrastructure capable of supporting systematically important markets, says Simone Cortese, chief product officer at wholesale payment infrastructure provider Fnality. “The distinction is not the technology alone, but the intent and the framework around it,” says Cortese. “A PoC can demonstrate that a process is technically feasible. Production-grade infrastructure has to demonstrate that it can operate safely, predictably and legally in live market conditions.” Fnality went live with its Sterling Fnality Payment System in December 2023, regulated by the Bank of England, and it is working to launch similar systems in other currencies.

That kind of wholesale infrastructure means having a robust business case, a clear legal framework, participant rules, credit and liquidity risk controls, operational resilience, cyber controls, bankruptcy protection, settlement finality and production-grade testing, says Cortese. “Systemically important infrastructure still innovates, but anything that migrates into live use must pass through rigorous quality assurance, governance and risk assessment gates. Often the best signal is quiet adoption: users rely on the infrastructure because it is dependable, valuable, and scalable, not because it is visible.”

Interoperability is another critical requirement for a wellfunctioning global digital money market, says Simone Cortese, chief product officer at wholesale banking payment systems provider Fnality because without it the industry risks recreating digital islands. “Regulators and policymakers have repeatedly warned that fragmented digital asset ecosystems could reproduce existing frictions in a new technical form. The objective should be a network-ofnetworks model in which value can move between platforms safely, with clear rules, controls and finality at the point of settlement.

“That requires interoperability between different forms of digital money, but also between money and assets. Without it, liquidity fragments and the utility of tokenised instruments is reduced. Settlement is the key connector between those environments, and settlement in central bank money balances materially reduces settlementasset credit risk when value moves between institutional networks.” In terms of emerging technologies, Cortese believes there are three likely to be particularly important for the digital money stack – AI-enabled automation, privacy-preserving technologies such as zero-knowledge proofs, and postquantum cryptography.

“AI can support operational automation, monitoring, exception management and liquidity optimisation, subject to appropriate controls,” says Cortese. “Privacy-preserving technologies will become more important as institutions seek to use shared or interoperable networks without exposing sensitive data unnecessarily. Post-quantum cryptography is a longer-horizon resilience requirement, but one that systemically important infrastructure should monitor as standards mature. The sequencing is not absolute; these capabilities will develop in parallel, and adoption will depend on safety, assurance and regulatory acceptance.”

As the digital money ecosystem develops and matures, it could arguably transform several aspects and processes – such as international payments, settlement and liquidity management. “The right instrument depends on the use case,” says Cortese. “Stablecoins and tokenised deposits can play important roles in a multi-money ecosystem, particularly where their legal, regulatory and risk characteristics are appropriate for the flow. Wholesale settlement is different. For large institutional obligations, especially those connected to systemically important markets, participants and supervisors generally place a premium on settlement in central bank money because it minimises settlement-asset credit risk and supports confidence in finality.”

A mature digital money stack should allow different instruments to coexist, while ensuring that the final settlement leg for wholesale risk transfer can occur in central bank money where required, says Cortese. “The real prize is liquidity: moving from static end-of-day balances toward intraday, interoperable liquidity mobilisation across currencies and jurisdictions. The objective is to allow cash to be mobilised, reused and orchestrated more efficiently across jurisdictions while preserving regulated settlement discipline.”

BUSINESS CONDITIONS

There’s often a tendency when we talk about ‘building blocks’ to focus on the technical aspects versus the business conditions needed for more meaningful institutional participation in these markets, says Ross Dilworth, head of strategy and partnerships at Baton Systems. In particular, how do you solve the ‘adoption problem’ that constrains many new networks and technologies. “Discussion rightly focuses on the importance of strong foundations like legal and regulatory clarity,” says Dilworth. “But practically more focus is required on the design of new solutions to ensure they are easy to adopt – for example to integrate with existing processes, to provide open and widespread access to all participants, and to provide participants with choice rather than constrain to specific settlement assets which may or may not have liquidity or gain market traction

“We need an ecosystem that supports hybrid markets – where traditional, digital and tokenised assets sit alongside each other, enabling institutions to extend their existing operating systems and processes they already run to support new digital forms of value. Without this, new digital solutions will only work in isolation and nowhere else,” says Dilworth.

Fortunately the market is shifting from the early years of digital experimentation on pilots and PoCs towards a more commercial focus on proof of value and initiatives which deliver immediate business value and scale towards industrialisation, says Dilworth.

“A PoC tells you an idea can work in isolation, but almost nothing about the industrial-grade process, security and control which is needed to move real value every day, at scale. PoCs are often run with a simple, usually predetermined outcome within curated lab conditions so are rarely genuinely experimental. The resilience required to operate a systemically important infrastructure is night and day when compared to the primitives required for a simple PoC,” says Dilworth.

“But every solution starts with the first step, so the emphasis is on good design to ensure that the infrastructure can scale, not just in volume or timeliness, but across use cases, market participant types and so on,” says Dilworth. “Most financial markets processes depend on the movement of money – there is nothing more fundamental – so the emphasis on solutions and trusted operators that can prove they already operate at scale, with resilience and security is critical to generate confidence needed for adoption.”

Interoperability is typically positioned as the answer to digital assets’ ‘walled garden’ problem but Dilworth believes this is the so-called ‘easy part’ and oversimplifies the conditions required for adoption. “Traditional markets don’t rely on assets ‘interoperating’ to be liquid. EUR doesn’t ‘interoperate’ with USD, and nobody’s waiting for it to. Both sit inside a deeply connected FX ecosystem, built on standardised roles, settlement frameworks, liquidity networks and market structure. That’s what makes them usable together, not some technical bridge between the two currencies themselves,” he says.

“Stablecoins, tokenised deposits, wholesale CBDCs and commercial bank money are the same. Each is a distinct asset that has to be assessed and adopted on its own terms. What actually matters is building the ecosystem, the collaborative networks, enabling services and choice, that let institutions access the liquidity they need and put it to work on the business purposes that are important to them.”

When it comes to cross-border payments, the problem statements for capital markets are relatively well understood, says Dilworth – lack of transparency, certainty and speed, the challenges around settlement risk, and the need for tools that help manage liquidity implications of these movements for example.

“Operating these processes on a more digital real-time stack offers huge potential and enables further growth in these markets,” says Dilworth. “For example, optimising funding and liquidity requirements allows institutions to increase business capacity and reduce cost, whilst addressing settlement risk and providing settlement finality opens up new markets and segments for clients and regions that may traditionally have been seen as higher risk, sometimes due to timezone differences.”

And building this for a hybrid future, allows institutions to leverage new digital instruments alongside existing business processes and traditional or fiat forms of money, thus easing the adoption and utilisation of digital money form, says Dilworth. “Some would argue that building for a hybrid world would risk a ‘lowest common denominator’ design – but in practice it recognises where every firm is today, and enables a move to a ‘best of breed’ solution. And the benefits of open networks compound: the more volume moving through a shared network, the greater the liquidity efficiency for everyone on it.”