Why yield-bearing bonds could never be money (the technical barriers)

Written by David Parsons and Jonny Fry, * London Digital Escrow

Part 3 of 8: “The case for the singleness of money”

The technical problem: detachable coupons

Let’s start with a simple question: “Why didn’t the British government just issue yield-bearing bonds and then use them as a form of payment?” If bonds pay interest, why not use them as money? They would have all the advantages of currency plus the benefit of yield, they would be backed by the government and they would be more attractive than money because they earn interest. The answer is: historically it was technically impossible. For most of history, bonds were issued with detachable coupons. Here’s how it worked:

The coupon system

Imagine a bond issued by the British government in 1850:

· the bond - a physical certificate representing £1,000 of government debt

· the coupons - attached to the bond were 80 small coupons (one payable every six months for each year of the 40-year bond term)

· the interest payment - each coupon represented an interest payment (say, £25)

· the redemption - on maturity, the bondholder could redeem the bond itself for £1,000 - i.e. would get the £1,000 paid back.

Hence, to receive an interest payment, the bondholder was required to:

· clip the coupon from the bond (literally cut it off with scissors)

· present the coupon to a bank or government office

· wait for verification (which could take days or weeks)

· receive the payment (historically in gold or silver coins).

However, this system had several logistical challenges:

Problem 1: divisibility

Bonds came in large denominations (£100, £1,000, £10,000). You couldn’t easily divide a bond to make a small purchase. If you wanted to buy a loaf of bread for one shilling, you couldn’t use a £1,000 bond. You would need to: sell the bond (which took time and required finding a buyer), convert the proceeds to smaller denominations and make the purchase. This made bonds impractical for everyday transactions. You couldn’t walk into a bakery with a £1,000 bond and expect to buy bread. The divisibility problem was fundamental.

Problem 2: interest payment logistics

Interest payments required physical processing:

· coupon clipping - the bondholder had to physically cut the coupon from the bond.

· coupon presentation - the coupon had to be physically delivered to a bank or government office.

· verification - the coupon had to be verified as genuine (was it really from the government? was it a forgery?)

· record-keeping - the payment had to be recorded in ledgers

· settlement - the payment had to be made (in coins or notes)

Each step took time - coupon processing could take weeks. Moreover, during that time, the bondholder didn’t have access to the interest payment. The payment was wedged in the system, waiting for verification and processing. Into the bargain, coupon processing was expensive - banks charged fees for processing coupons and these fees reduced the effective yield on the bond. If a bond paid 5% but the bank charged 1% in processing fees, the effective yield was only 4%.

Problem 3: verification challenges

Bonds were bearer instruments - ownership was determined by possession and this created counterfeiting risks, such as:

· coupon counterfeiting - criminals could create fake coupons that looked identical to real ones

· bond counterfeiting - criminals could create fake bonds

· verification delays - each coupon had to be verified as genuine before payment

· no centralised registry - there was no central database of legitimate bonds and coupons.

The verification problem was particularly severe. How could a bank verify that a coupon was genuine? They would need to:

· check the paper quality (was it the right type of paper?)

· check the printing quality (was it printed correctly?)

· check the serial number (was it a legitimate serial number?)

· check the bond registry (was this coupon from a legitimate bond?)

All of this took time and expertise - verification could take weeks and there was always a risk of fraud. In addition, sophisticated counterfeiters could create coupons that were nearly indistinguishable from real ones.

Problem 4: redemption complexity

Bonds had fixed maturity dates. Therefore, if you owned a £1,000 bond that matured in ten years but you needed cash today, then you had limited options. You could try to find someone to buy the bond from you but there might not be any buyers. Or you could try to borrow against the bond but that required finding a lender and negotiating terms, and all of this could take days or even weeks. This illiquidity meant that bonds couldn’t function as currency since currency needs to be instantly convertible to other goods and services: bonds are not easy to instantly be convertible.

Problem 5: velocity of money

Most importantly, yield-bearing bonds created a fundamental problem for monetary velocity. If you hold a bond that pays 5% interest, you have an incentive to hold it, not spend it. The longer you hold it, the more interest you earn but this reduces the velocity of money (the rate at which money circulates through the economy). Suppose you have £1,000. You can either:

· hold it as currency (no yield, but you can spend it anytime)

· hold it as a bond (5% yield, but you can’t spend it easily)

If you hold it as a bond, you earn £50 per year in interest. This creates a strong incentive to hold the bond rather than spend it. You would only spend it if you absolutely needed to. But if everyone holds bonds rather than spending them, money doesn’t circulate and the velocity of money approaches zero. Money is most productive when it circulates: a higher velocity of money generally reflects stronger economic activity, with households and businesses transacting more frequently, supporting growth in output and income. Yet velocity is a double-edged sword. If money begins moving too quickly, particularly through autonomous AI agents and programmable payments, it can amplify demand, distort price signals and contribute to inflationary pressures that challenge traditional central bank policy tools. This is the fundamental incompatibility between yield-bearing money and a functioning economy - money that pays yield creates incentives to hoard it and money that is hoarded doesn’t circulate. Essentially, money that doesn’t circulate can’t function as a medium of exchange.

Britain announces the launch of the first digital gilt

Source: X

Why this mattered

These technical barriers meant that bonds could never be used as an everyday currency. They were too large, too complex, too difficult to process, and too illiquid. So, the British government maintained a clear distinction:

· currency (coins and notes) - no yield but liquid, divisible, easy to transact and high velocity.

· bonds - yield-bearing, but illiquid, complex, impractical for transactions and low velocity.

This distinction was maintained for centuries: it was not a policy choice - it was a technical necessity. The technology of the time simply didn’t allow yield-bearing instruments to function as currency.

The digital age: barriers crumbling

But here’s where technology changes everything. In the digital age, many of these technical barriers have disappeared, for example:

· divisibility - digital assets can be divided into infinitesimal units (down to 10^-18 of a unit if needed)

· automation - coupon payments can be automated through smart contracts (instant, no human processing required)

· verification - blockchain technology provides cryptographic verification (instant, tamper-proof, no central authority needed)

· redemption - digital assets can be redeemed instantly (24/7, no delays)

· liquidity - digital markets provide 24/7 liquidity (you can sell instantly at any time)

Let’s examine each of these:

Divisibility in the digital age

A digital stablecoin can be divided into infinitesimal units. If you want to buy a loaf of bread for £2, you can transfer exactly £2.00000000000001 (or any amount down to the smallest unit). There’s no need to have a £1,000 bond - you can have any denomination you want.

Automated interest payments

In the digital age, interest payments can be automated through smart contracts. Instead of clipping coupons and presenting them to a bank, the smart contract automatically calculates and distributes interest payments. This happens instantly, without human intervention.

Imagine a stablecoin that automatically pays 5% annual interest. The smart contract calculates the interest every second and automatically adds it to your balance. You don’t have to do anything as the interest is paid automatically.

Cryptographic verification

Blockchain technology provides cryptographic verification. Every transaction is verified using mathematical algorithms. There’s no need to check paper quality or printing quality - the cryptography is tamper-proof. If someone tries to create a fake coin, the cryptography will immediately detect it.

Instant redemption

Digital assets can be redeemed instantly. If you own a digital stablecoin, you can convert it to another asset instantly. There’s no waiting for verification or processing - the transaction happens in seconds.

24/7 liquidity

Digital markets operate 24/7. You can buy or sell digital assets at any time, day or night, weekday or weekend - there’s always liquidity. This means that digital assets are highly liquid.

The catastrophic implication

Suddenly, yield-bearing digital assets can function as currency - the technical barriers that prevented this for centuries have vanished and this is why the GENIUS Act modification will be so dangerous. When the US government allows yield pass-through on stablecoins (a change that could happen within 18-24 months) it will remove the last technical barrier to yield-bearing currency. It is reported: “Standard Chartered analysts previously estimated that a yield provision, if enacted, could redirect up to $1 trillion in deposits away from traditional banks toward stablecoin products by 2028.” And what will happen? Exactly what economic theory predicts: Gresham’s Law in action.

The GENIUS Act experiment (projected)

Once the GENIUS Act is modified to allow yield pass-through, something remarkable will happen. Multiple competing stablecoin issuers will emerge, each offering different yields:

· issuer A (USDA) - 4.2% yield

· issuer B (USDB) - 4.8% yield

· issuer C (USDC) - 5.3% yield

· issuer D (USDD) - 5.7% yield

All of these are backed by US Treasury securities, all of them are equally safe. The only difference is the yield. Corporations and individuals will immediately begin hoarding the highest-yield stablecoins (issuer D) and spending the lowest-yield stablecoins (issuer A). Why would you spend 5.7% yield money when you could hold it and earn 5.7% annually? You wouldn’t - you would only spend it if you absolutely had to. You would hoard the high-yield money and spend the low-yield money. This potentially will create exactly the bifurcated monetary system that economic theory predicts. Two different “monies” with two different economic properties:

· high-yield stablecoins - hoarded, not spent, low velocity

· low-yield stablecoins - spent freely, high velocity

The velocity of money will fragment; monetary policy will become impossible and so the central bank’s models come under enormous pressure. Andrew Bailey sees this coming - he has warned about it. The technical barriers that have protected monetary singularity for centuries are crumbling.

What comes next?

This week, we’ve seen how technical barriers historically prevented yield-bearing bonds from being used as currency, we’ve seen how those barriers have crumbled in the digital age and we’ve seen how the GENIUS Act experiment will demonstrate the consequences. Next week, we’ll examine the projected impact of the GENIUS Act modification. We’ll see exactly how Gresham’s Law will operate in a digital, yield-bearing currency system. And we’ll begin to understand why Andrew Bailey’s warnings about monetary fragmentation prescient exist.

Next week: “How the GENIUS Act proved Gresham’s Law in real-time”

Series Overview

This is Part 3 of an 8-part series exploring “The case for the singleness of money”. Each week, a new article will build on the previous one, exploring why monetary singularity is essential, why it is being destroyed and what comes next.

Coming in this series:

Part 4: How the GENIUS Act proved Gresham’s Law in real-time

Part 5: Why yield-bearing money destroys the banking system

Part 6: How tax payments became the ultimate monetary weapon

Part 7: The agentic USD threat to sterling sovereignty

Part 8: The twisted ending: why singularity is dead

*Jonny Fry is a director of London Digital Escrow