Event Summary: Fungibility & Interoperability in the Digital Money Ecosystem

In this panel in collaboration with the Digital Pound Foundation, the panelists discussed topics around the concepts of  fungibility and interoperability, how they interrelate and why they are important considerations for the future of new forms of digital money. For those who missed the panel, you can watch the panel on YouTube, listen to the event as a podcast or read through this comprehensive summary of the event.

At the beginning of this panel, Helen Disney, director of The Realization Group conducted the introduction of this panel, to give a rough outline of what the content of the panel is about and to welcome the panelists. The panel was moderated by Jannah Patchay.

Jannah Patchay is the policy lead at the Digital Pound Foundation and is an originated member of this organization which was established in October 2021. The Digital Pound Foundation aims to develop a well-designed digital pound for the UK in a public or private form. Jannah has gathered considerable business experience  in various consulting roles in the financial services area.

Dr. Jonas Gross is the chairman of the Digital Euro Association. Beside this role he is the Head of Digital Assets and currencies of the etonec GmbH, based in Berlin. He recently earned his PhD in economics, with focus on CBDCs.

Martin Hargreaves is the Chief Product Officer of Quant. He has more than 12 years business experience in financial services and is part of the Steering Committee at the Digital Pound Foundation.

Diego Ballon-Ossio is a Senior Associate at Clifford Chance. His first business steps were as a lawyer in the UK. He is now focusing on digital assets and cryptocurrencies.

Ousmène Mandeng is a Senior Advisor for Blockchain and Multiparty Systems at Accenture for about almost 4 years. Ousmène is also a ​​visiting fellow at the London School of Economics and Political Science (LSE). He is focusing as a project manager in several leading CBDC projects. 

Before Jannah Patchay addressed the outlined questions to the panelists, she explained the working mechanisms of a typical transaction from her fiat bank account to another bank in the same country. Thus, there are two types of commercial bank money, that are converted to another which happens in the background and is undisclosed to the bank customers. A look behind the scenes reveals that there is no fully autonomous technical infrastructure that supports the conversion of two different forms of money. There is also a framework free of legal and regulation scrutiny that gives bank customers confidence in their ownership of fiat money. The displayed balance in a bank account gives confidence to bank customers that the commercial bank money (i.e., the amount you see in your bank account) and cash money (i.e., public money) has the same value, as both are different forms of money.

1)    What are the different forms of money that are around today and how will they expand in the future, as there are new forms of digital money?

According to Ousmène, there are two dimensions of money: First, the issuing source or entity of money. From his point of view, money is a liability on someone. If, for example, the Bank of England is issuing the money, it is a claim. The second dimension are two existing types of mediums. There are at first physical tokens like coins and banknotes and the second type is book money (i.e., a certain kind of money in your bank account).

Jonas added that with the adoption of Bitcoin since 2008, cryptocurrencies are not a claim of the commercial bank and central bank at all. And in the future, there will also be CBDCs that will change the monetary system and will give the payment a diversity and new use cases.

From Diego’s point of view, people place trust in the commercial banking system. As the banking system is built on trust, people adhere value to legal tender like EUR or GBP. This concept makes book money euro the same as another euro equivalent to euro cash.

He added that a legal tender is not the same as money. In many cases, legal tender is of course money, but if for example coffee shops adopt bitcoin as an option for payment due to Bitcoin receiving legal tender status in that country, it is up to the customers if they like to pay either in fiat currencies or cryptocurrencies. There is the case that the coffee shop must accept both payment options.

From Martin’s perspective the legal regulatory framework and the use cases of payment instruments are important to preserve the singleness of EUR or GBP in the future. The interoperability of stablecoins with fiat currencies are important to preserve singleness as well.

2)    What is fungibility and why does it matter when we consider the relationship between public and private forms of money?

From Martin’s point of view, it depends on how easy the convertibility from one form of money to another form is. As a reason, Martin refers to the old paper notes from the Bank of England that are not valid for spending and will not be accepted at commercial banks anymore. They do have the same value as common GBP paper notes, however, they are only convertible by the Bank of England as it is the same issuer.

With a CBDC, cash money and central bank reserve money this would become a  more and more seamless procedure. The more seamless it is going to be, the fungibility of money rises and will give value to public and private forms of money.

3)    What is the difference between fungibility and interoperability?

From Jonas’ perspective the meaning of fungibility is the ability of an asset to be interchangeable with another asset of the same type. The explained indistinguishability of an asset is important when it comes to CBDC’s and stablecoins. There are not any issues regarding fungibility as it is important to interchange them with other public currencies. As a CBDC would be a claim of the Central Bank, there will not be any fungibility issues as the central bank is the sole issuer. The central bank once specified that if a CBDC will be converted there is fungibility of bank deposits.

Ousmène added an easy example for fungibility: Fungibility describes if you have a 10 GBP note and you exchange it for 2x 5 GBP notes.

When it comes to interoperability, Martin holds the opinion that interoperability is about the acceptance of a given store of value. For example, bank accounts are interoperable with many systems that the bank is interoperable with. From a consumer’s point of view, interoperability is what people can do with money and leads by for example how far are people able to spend the money. He added that interoperability between payment systems is a more complicated process as each of the systems has a community that is going to settle the central bank liabilities.

Jonas refers to the definition of the Bank for International Settlements (BIS) that says that interoperability is the technical compatibility that enables a system to be used in conjunction with other systems. From his own point of view, interoperability is technology-based while fungibility is convertibility and has a high level of risk for the underlying assets.

4)    Are there legal or logical criteria that make something fungible?

From Martin’s point of view, if there is the same issuer that represents the same claim, a currency is indeed fungible. If there is a different issuer, currencies are going to be converted.

Jannah refers to Martin’s opinion and summarized as an example that her HSBC bank money would be only convertible with Jonas’ Barclays bank money, but they are not fungible as there are different issuers.

From the point of view of legal criteria, Diego agreed with Jannah, considering that the money of HSBC Bank entails that there is also a claim against HSBC.

5)   What are the challenges of interoperability with existing payment systems as well as existing bank money?

From Ousmène’s perspective, interoperability seems to be a bit of a headache for the adoption of a CBDC. In today’s systems there is no interoperability as banks are isolated and the only way of communication for them is via secure messaging. For the future of interoperability, it will be important that two blockchains are able to communicate with one other if possible.

Another dimension of this perspective is that interoperability is between blockchains and integration is between a blockchain application with existing systems. For a token-based financial market infrastructure to be successful means to be fully seamlessly integrated into the existing infrastructures.

6) How can jurisdiction’s legal and regulatory framework support interoperability between CBDC and stablecoins?

According to Diego, when it comes to bringing the concepts of fungibility, convertibility and interoperability together and how a regulatory framework can support CBDC and stablecoins in this regard, from his point of view interoperability is not a legal affair. However, fungibility and convertibility does exist in the law. Fungibility is the ability to distinguish a debt claim by paying something by more than one acceptable means of payment. If there is a need to work out what the value of another payment would be to distinguish a debt, it is convertible.

Following the panel discussion, the audience directed their questions about fungibility and the transition to digital money to the panelists:

1)  If fungibility has the same issuing convertibility as it does between different issuers, how can blockchain help facilitate both?

From Jonas’ point of view, blockchain is a great tool to provide a standardized platform where there are distributed tools and distributed consensus, as it facilitates different parties to find a common agreement.

2)    What creates fungibility? Is it market reception or is it law?

From Ousmène’s point of view, fungibility is about market practice. The concept of money is fairly loose: people are usually able to pay with their preferred currencies in most foreign countries. In this case, market practice is more important than legal concepts.

3)    How can the transition in a seamless world in which new forms of digital money coexist for the existing forms and the experience for the consumer happen?

From Jonas' perspective, the user experience should be as convenient as possible and should be integrated within proven digitized forms of communication like QR codes. People do not care about the complexity in the background.

Martin added that there must be the same level of trust for CBDC and stablecoins that people adhere to their bank accounts.

From Diego’s point of view, the seamless transition will not happen overnight and will continue to take time. People really need to experience and understand the benefits and protection of using CBDC and stablecoins to get adopted as a standard procedure in people's life. However, at the moment these factors are not given.

About the author

Luca Rose joined the DEA as an associate in October 2021. He is curious about the development of cryptocurrencies in general and the adoption in sectors such as finance, industry and logistics.

Feel free to join him on LinkedIn.

This article was prepared by the author. The views expressed in this article are the author’s own and do not necessarily reflect the views of the Digital Euro Association.