The Disconnect Between Sound Money And Sound Payments: A New Tension In The Monetary System In The Digital Age

The modern monetary system is evolving into an increasingly complex ecosystem involving a wide range of market participants. While banks have traditionally occupied the central role in both the monetary and payment systems, they are now facing growing competitive pressure from fintech companies, payment platforms, crypto-asset service providers, and stablecoin issuers. This transformation is not merely a matter of technological innovation; it also raises fundamental questions about the role of law institutions, and public financial safety nets in shaping the future of the monetary system.

The traditional banking system has historically enjoyed a privileged position with respect to both money creation and access to payment infrastructure. Legally, bank deposits represent a bank’s debt owed to the depositor. However, this liability is not treated in the same manner as an ordinary private law obligation. Owing to deposit insurance schemes, the central bank’s role as lender of last resort, dedicated bank resolution mechanisms, and robust prudential regulatory frameworks, bank deposits are widely regarded as a reliable form of money. As a result, banks enjoy a significant institutional advantage in the creation of “sound money”.

By contrast, the new generation of financial technology companies is often able to offer payment solutions that are faster, more cost-effective, more user-friendly, and more accessible. Mobile payment applications, peer-to-peer (P2P) payment platforms, crypto-asset exchanges, and stablecoin-based arrangements can provide significant advantages over the traditional banking system, particularly in the context of cross-border payments and the real-time transaction models demanded by the digital economy. However, most of these market participants do not benefit from the public financial safety net available to banks. This has created a fundamental divide at the heart of the modern monetary system: sound money largely remains within the banking sector, whereas superior payment solutions are increasingly being delivered by non-bank financial platforms.

This divergence is also particularly noteworthy from the perspective of user behavior. During periods of economic stability, individuals and businesses tend to prioritize speed, convenience, and cost efficiency. As a result, payment instruments that offer a superior user experience, despite being comparatively less secure, may gain widespread adoption. By contrast, during periods of uncertainty, financial crisis, or systemic stress, users tend to place greater value on safety and institutional reliability. In such circumstances, demand shifts towards forms of money that are perceived as secure and supported by robust institutional safeguards. In this context, it may be argued that Gresham’s Law can be reinterpreted for the digital age. During periods of stability, “bad money” may displace “sound money” by offering superior payment functionality. Conversely, in times of crisis, “sound money” once again becomes the preferred choice as users increasingly prioritize safety.

This development gives rise to a dual responsibility for policymakers. On the one hand, the regulatory framework and public financial safety net supporting the banking sector must be preserved in order to safeguard financial stability. On the other hand, allowing technological innovation in payment systems to be driven exclusively by non-bank and inherently more vulnerable market participants may create new systemic risk over the long term. If the shadow monetary system continues to expand and reaches a scale capable of competing with the traditional banking sector, uncoordinated failures or crises of confidence within these structures could threaten the money supply, the continuity of payment services, and, financial stability.

The real challenge, therefore, is not to choose between banks and fintech firms. Rather, the fundamental question is how the legal framework can bring together sound money and an efficient payment infrastructure within a single, coherent system. The monetary system of the future should not merely deliver faster and more cost-effective payment solutions; it must also provide a transparent, accountable and resilient framework that protects users’ monetary claims. Unless the divide between sound money and efficient payment technology is bridged, digital financial innovation will continue to generate both significant opportunities and substantial vulnerabilities.

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