The article was first published on OMFIF on January 23th, 2026.

Ousmène Mandeng is Director of Economics Advisory and Visiting Fellow at London School of Economics and Political Science.

Instant financial transactions and the demise of money (at the limit)

Tokenisation promises to make financial transactions effectively instantaneous and frictionless across a broad range of assets. Interest-bearing securities could be converted into money on demand and converted back just as quickly. In such an environment, holding money in advance of payments may no longer be necessary. Money balances would shrink towards zero and, at the limit, disappear altogether. Reducing transaction frictions would therefore not just improve efficiency, it would recalibrate the value of money itself.

In monetary theory, money derives its value not from intrinsic payoff but from the frictions that characterise decentralised exchange. When payments must be settled before receipts are obtained, when assets cannot be instantly converted into purchasing power or when valuation and settlement are costly or uncertain, holding money relaxes a binding constraint on trade. These frictions generate a liquidity premium that makes it rational to hold non-interest-bearing balances despite their opportunity cost.

Friction creates value

This logic is central to cash-in-advance and transactions-cost models. In these frameworks, money is held because converting interest-bearing assets into means of payment is costly or slow. Classic inventory-theoretic approaches, from the Baumol-Tobin model onwards, show that agents optimally carry transaction balances across time to economise on portfolio adjustment costs. Money demand is therefore proportional to the cost or latency of moving resources from the asset market into the payments market. When frictions are large, agents pre-fund purchases by holding money; when frictions are small, they rebalance more frequently and carry smaller idle balances.

When any securities portfolio can be converted into money on demand, without delay, cost or haircut, the cash-in-advance constraint ceases to bind in any meaningful intertemporal sense. Agents no longer need to hold money. Instead, money is obtained just in time for settlement and immediately reconverted into yield-bearing assets. Money continues to exist as a settlement instrument, but only as a transient state within the transaction flow rather than as an asset held across time.

Collapsing transaction costs

A typical transaction would proceed as follows. To acquire an asset, the buyer converts their securities portfolio into money to pay the seller in a delivery-versus-payment transaction. Upon receipt, the seller immediately converts the money into a securities portfolio. Money would exist as a unit of account but no longer be held as a store of value.

In this limit, equilibrium money holdings approach zero even as payment volumes remain large. Required transaction balances are proportional to payment flows multiplied by settlement time; as settlement time tends to zero, the stock of money required to support any finite flow of transactions also tends to zero. Measured velocity therefore becomes unbounded – not because money is irrelevant, but because the same unit of money can intermediate an arbitrarily large volume of transactions when it is recycled almost instantaneously.

Crucially, this does not imply a return to barter. Prices continue to be quoted in a single unit of account and exchange remains organised around centralised valuation rather than bilateral negotiation over asset-specific terms. Instant conversion shifts the complexity of valuation upstream into the pricing and clearing infrastructure; the buyer’s asset is priced in money terms before payment, while the seller receives settlement balances denominated in the unit of account. Assets function as a funding source for transactions, not as objects of exchange.

Bank deposits would compete directly with asset portfolios and interest rates would converge across instruments. At the limit, interest rates could fall materially as the supply of funding overwhelms the supply of investable assets. The traditional boundary between banking and capital markets would increasingly blur.

The opportunity cost of holding money also depends on the level of interest rates. At very low rates, the distinction between holding money and holding assets narrows. At positive rates, however, holding money becomes increasingly costly relative to interest-bearing alternatives, strengthening the incentive to minimise idle balances when conversion is frictionless.

Settlement, not storage

Naturally, a fully frictionless environment remains difficult to achieve in practice. Yet tokenisation moves markets decisively in that direction. If money has largely been an artefact of transaction frictions, then their erosion will cause money balances to shrink dramatically.

The implications are profound. It would in large part change the funding structure of the banking system and hence in large part of the economy. Banks’ balance sheets may look more like investment funds. The demise of money may be the next big thing in money innovation.