§25 Paths of Transition

Protocol collaboration and state monetary monopoly will long coexist with marginal erosion—from a fiat-only landscape toward a layered ecosystem of multiple protocols and multiple units, what is the path? Transition spans decades, not an overnight technical revolution; cross-border settlement, supply-chain private-domain networks, machine-readable tokens, and autonomous-program settlement are scenes where marginal substitution lands first. Below we discuss starting points, mechanisms, constraints, and the respective roles of enterprises, individuals, regulators, and autonomous systems.

Section 1 The Logic of Marginal Substitution

Estonia’s e-Residency and digital-identity system and Singapore’s Project Guardian tokenization trials represent states gradually absorbing on-chain settlement through “sandbox” approaches rather than abandoning fiat monopoly overnight.

To discuss transition, one must first drop the imagination of “overnight full replacement.” Fiat will not declare death on some day; central banks will not close after a parliamentary resolution. Real transition occurs at the margin, accumulating gradual functional substitution into structural change.

The mechanism of marginal substitution: in scenes where the existing fiat system serves weakly or costs are high, new protocol tools embed step by step, accumulating users and liquidity, forming local positive network effects, then expanding substitution scope. This logic contrasts with Knapp-style tax anchoring: tax obligations create rigid domestic-currency demand in domestic retail and wage flows¹, but cross-border B2B, open-ecosystem internal settlement, and store-of-value demand at high-inflation margins are not equally bound by a single sovereign unit of account—marginal substitution therefore enters first where anchors fail or friction is highest, not from supermarket checkout counters. Brunnermeier and Niepelt (2020) give testable institutional premises for this path: parallel units must be convertible to the public anchor when needed and fiscal–central-bank division must recycle liquidity overflow—missing any condition, parallel currencies degenerate into non-interconvertible IOUs, not an expandable settlement layer². Canzoneri, Cumby, and Diba (2001) further note that even with parallel units, the price level long-term must align with fiscal solvency—Sims (1994) fiscal theory of the price level (FTPL) writes the same constraint into a minimal model: under active fiscal paths, inflation is equilibrium outlet for debt dilution, not mere technical choice³. Cross-border corridors and high-inflation store-of-value scenes often precisely activate the C-money layer where tax bases are weak or anchors fail—this does not negate Knapp-style tax demand but shows Goodhart-style M-money / C-money division boundaries drift with anchor strength. Fullwiler’s description of MMT operational reality mirrors here: when tax bases are weak, capital flight, or political pressure erodes the fiscal anchor, the “spend first, recycle later” cycle can still operate at the operational level, but inflation constraints quickly surface in Sargent–Wallace-style rebound—stablecoin penetration in high-inflation economies is partly result of dual failure of tax and fiscal anchors, not mere tech fashion⁴. Sargent–Wallace’s “unpleasant monetarist arithmetic” reminds from another angle: when fiscal deficits persist while the central bank cooperates with low rates, the domestic anchor itself loosens through inflation rebound⁵—marginal substitution leads in weak institutions; in developed economies where anchors remain strong, retail-layer substitution must be measured on generational scales.

This book does not advocate overnight abolition of domestic legal tender, but accumulation of marginal substitution outside scenes where fiat anchors remain strong—spiritually aligned with Mr. Hayek’s revised-edition Chapter 1 “A Realistic Proposal” that European countries mutually open currency and banking competition—superior to issuing a common European currency—as a gradual first step in transition rhythm; competitive units shift from bank-personality competition to verifiable protocol-rule competition; state money and central banks will still coexist for the foreseeable period.

One must simultaneously distinguish transition strategy from institutional endpoint: Mr. Hayek long held that for competitive discipline to fully operate, forced legal tender must ultimately be removed so bad money can be rapidly eliminated by markets—this is a directional premise, not a day-one operations manual. In Chapter 22 Mr. Hayek also requires one-time release of competitive freedom at transition, avoiding gradual monopoly residue (pp. 121–122)—this book takes a more conservative marginal-substitution path on political feasibility, using warnings of old fiat rapidly depreciating under competitive pressure to show: even without overnight abolition of legal tender, monopoly currency runaway depreciation must be prevented⁶. From this follows a transition path: marginal substitution and sandbox adoption first; legal tender and tax anchors in domestic retail left to generational evolution; not using “gradualism” to evade competitive discipline’s logical endpoint, nor using “endpoint” to skip transition’s contractual continuity and political feasibility—compliance interfaces, audit trails, and governance timelocks must advance together with anti-re-monopolization design.

The most typical entry scene is cross-border payment. Traditional cross-border remittance relies on correspondent-bank systems, passing multiple intermediaries, multiple currency conversions, multi-day settlement cycles—fees weigh especially heavily on low-income remittance populations; global average remittance rates long exceeded 5%, some corridors over 10%. Stablecoin remittance actual fees are usually below 1%, settlement in minutes. Marginal substitution in this scene has already occurred in parts of Latin America, Southeast Asia, and Africa—not hypothetical.

Supply-chain internal settlement is another gradual path. Prepayment management, receivables financing, cross-border trade settlement—in these scenes settlement via VRC-11 private-domain stablecoins or dedicated enterprise tokens can reduce reliance on bank intermediaries, speed capital turnover, and reduce exchange-rate volatility interfering with contract performance. Internal settlement between large manufacturers and tier-one suppliers historically had precedents in commercial paper and internal bookkeeping as non-fiat tools; VRC-11-class tools merely move this practice onto programmable on-chain rails, giving stronger auditability and cross-organizational interoperability.

On-chain bond and equity financing is a more structurally significant gradual path. Real-world asset (RWA) tokenization already places sovereign bond fund shares, corporate bonds, and real-estate equity on public chains at growing scale. Traditional institutional investors’ gradual acceptance of on-chain assets will push clearing and settlement infrastructure toward hybrid mode—not either-or replacement. Hybrid mode means on-chain clearing and off-chain legal enforcement in parallel; smart contracts handle automation; traditional legal frameworks handle disputes and exceptions.

Cumulative effect of marginal substitution must not be underestimated. Historically commercial-bank deposit money replaced metallic coin and credit cards replaced cash—all through marginal substitution completing structural change. Looking back decades, change is startling; living inside, each year’s change is tiny. Transition participants need sufficient time horizon not to be misled by short-term noise before marginal substitution accumulates into structural change.

Section 2 Legal Clarity: The Biggest Bottleneck of Transition

If technology is already in place, the single largest factor constraining transition progress is severe lack of legal clarity. This judgment rests on many practical cases: countless valuable protocol projects stalled, migrated, or closed because they could not obtain reliable answers about their legal status.

Legal ambiguity exists at multiple levels. Product classification comes first: whether a token is security, commodity, currency, or payment instrument—different countries and regulators give different answers, standards changing anytime. Classification uncertainty directly affects compliance obligations: if deemed security, disclosure, investor suitability, broker licensing apply; if payment instrument, AML, stored-value management, payment-clearing rules apply. Building business under unsettled classification is construction on ground that may shift anytime. Read alongside tax anchoring: tax obligations force holding domestic currency but do not prohibit choosing other verifiable pricing units in contracts, cross-border, and permitted private-domain layers—EU MiCA separates “electronic money tokens” and “asset-referenced tokens,” drawing parallel rule space outside the legal-tender circle; transition’s legal task is therefore executable classification and liability chains for protocol units in off-anchor scenes, not abolishing tax anchors⁷.

Cross-border jurisdiction is the second layer of conflict. Public-chain protocols run globally; code deployment location, user location, and asset location often separate. Traditional jurisdictional principles depend on geographic nexus, yet public-chain assets are inherently geographically fuzzy. When a company registered in one country operates an Ethereum smart contract serving users in another, which country’s law applies? Current answers vary by event type, with mutually contradictory precedents. This ambiguity spawns much regulatory arbitrage—practitioners do not actively seek gray zones but passively adapt in rule vacuum.

Liability assignment is the third blank. Smart contracts execute automatically by code logic; when results cause user loss due to code bugs, external oracle manipulation, or parameter error, who bears legal liability? Contract deployer? Governance-token holders? Protocol foundation? Existing legal frameworks are almost blank here, preventing reliable legal opinions and blocking institutional investors needing clear liability chains.

Two paths improve legal clarity. Active path: industry and regulators jointly push specialized legislation or interpretive guidance clarifying classification, liability, and compliance routes—EU MiCA and some countries’ digital-asset frameworks are efforts in this direction, each with limits. Passive path: accumulation of judicial cases forming de facto precedent—long cycle, high cost, very unfriendly to practitioners trapped in legal gray. Either path, raised legal clarity is necessary precondition for accelerated transition. Ambiguity breeds opportunism and sudden heavy regulatory strikes—neither favors long-term sustainable ecosystem adoption.

Protocol designers can actively create conditions for legal clarity rather than passively wait for regulatory frameworks. Concrete measures: built-in compliance interfaces at protocol layer (KYC/AML whitelists, freezable addresses, on-chain audit logs) letting regulators fulfill obligations without overturning protocol architecture; active sandbox cooperation accumulating regulator-recognized compliant operation records in controlled environments; participation in industry standard-setting pushing self-regulatory frameworks regulators can reference. These investments raise compliance cost short-term but are the most effective path to accumulate institutional credibility before regulatory frameworks crystallize.

Legal clarity also closely relates to jurisdiction choice. Some economies have made clear, friendly digital-asset regulatory frameworks competitive strategy to attract innovative firms, providing operable compliance anchors for industry. This competition materially affects global regulatory landscape: when innovative firms can operate compliantly in more permissive jurisdictions, economies with harsh or fuzzy frameworks face pressure of talent and capital outflow. This is institutional dividend of regulatory competition for protocol ecosystems and external pressure pushing economies to clarify regulatory stance.

Section 3 The Role and Strategy of Enterprises in Transition

Enterprises are the most action-capable middle layer in transition. They combine flexible technology adoption with resources to drive institutional change; their collective behavior will deeply affect transition speed and form.

Large multinationals’ core challenge is rising complexity of multi-currency financial management. When employee wages must be paid in multiple fiat currencies, raw-material procurement involves emerging-market currencies, and digital-business revenue settles in stablecoins, traditional single bookkeeping-currency systems begin to friction. Demand for multi-currency treasury tools—including on-chain settlement accounts, automated exchange routing, multi-chain liquidity management—is real and being filled by protocol-layer firms focused on enterprise financial infrastructure. Tool maturity driven by this demand will in turn lower SME adoption thresholds.

Supply-chain scenes have special meaning for SMEs. When tier-one suppliers adopt on-chain settlement, downstream SMEs are often passively drawn in. Passive involvement is both pressure and opportunity: pressure to quickly learn new tools; opportunity that on-chain settlement can greatly improve SMEs’ receivables capital occupation—traditional bill financing has long cycles and high cost, while on-chain receivables can approach real-time confirmation and transfer, directly improving SME cash-flow structure. For cash-strapped SMEs, this improvement’s practical value may exceed remittance fee savings.

Mid-size enterprise strategy usually chooses: mature SaaS hosted services (outsourcing technical complexity) or self-built on-chain financial infrastructure (stronger customization but higher operational risk). Current ecosystem maturity favors the former: self-build cost high, security risk large, technical talent scarce; hosted SaaS choice requires careful review of provider compliance status and asset-security mechanisms, avoiding transferring rather than eliminating risk.

At corporate governance level, issues requiring serious attention: accounting treatment, tax filing, and disclosure standards for on-chain assets are not unified. Whether to measure on-chain assets at fair value or historical cost differs across accounting frameworks. This is not merely technical but board risk judgment under incomplete information. Early entrants can build internal frameworks with auditors and tax advisors, accumulating practical experience before standards unify—this first-mover advantage becomes institutional competitive barrier when rules finally clarify.

Section 4 The Real Thresholds for Individual Participants

“The popularization of money” is often understood as personal-empowerment slogan, yet honest assessment of real thresholds is equally indispensable. Popularization means participation opportunity opens to individuals, not that participation risk is automatically eliminated.

Individuals’ first challenge is private-key management. “Not your keys, not your coins” holds technically, yet practice demands far higher security awareness and discipline than most ordinary users’ habits. Cold-wallet mnemonic management, multisig setup and recovery, hardware-wallet use—each exceeds ordinary banking operations. Forgotten mnemonics, hardware failure, phishing attacks have caused permanent asset loss for many users. Much loss falls on ordinary participants who should benefit most from popularization—they most need lower thresholds yet often first become victims of security gaps.

Financial-literacy requirements also rise. Reading a protocol’s tokenomics document requires grasping supply curves, incentive mechanisms, governance structure; evaluating stablecoin collateral adequacy requires first distinguishing stable-mechanism spectra (Maker-style liquidation auctions vs. VRC-10/11, see glossary). These demands are hard even for well-educated finance practitioners; for broad ordinary users they are significant cognitive burden. Education gaps do not auto-close with technology; financial-literacy improvement speed is often hidden bottleneck constraining social spread of new financial tools, impact sometimes exceeding technical maturity itself.

Fraud and information asymmetry are another real constraint. Protocol-token markets have high information asymmetry: insiders know project progress far better than external investors; on-chain data are public yet interpretation needs professional skill. Rug pulls, structural Ponzi yield protocols, fake audit reports are widespread fraud forms in current ecosystems. Technology can raise transparency but cannot eliminate individual differences in information discrimination.

Popularization’s advance must accompany effective consumer protection and investor education. Consumer protection and investor education are institutional guarantees for sustainable popularization—not contradictory to popularization ideals. An ecosystem where participants suffer large-scale loss will ultimately lose claimed inclusive value through credibility collapse. For individuals, participation premise is minimum literacy to identify risk, not being blinded by tech-optimist narrative.

Custody-service choice and evaluation is among individuals’ highest-weight decisions. For ordinary users unwilling to bear self-custody complexity, centralized exchanges and custodians offer lower-threshold paths but introduce counterparty risk—historical failures of leading exchanges causing user asset loss are real cost of this risk. Evaluating custodian audit reports, proof-of-reserve mechanisms, insurance coverage, and regulatory compliance is basic judgment ability when choosing custody paths.

From broader social view, financial-literacy improvement is not only personal responsibility but public good. If basic education does not incorporate digital-asset fundamentals into financial-literacy curricula, as protocol ecosystems penetrate, vulnerable groups (elderly, low-income, financially illiterate) will bear higher risk exposure than early adopters—popularization’s distributional effect may backfire. This social dimension often ignored in popularization policy discussion must enter policymakers’ view parallel to regulatory design. If popularization benefits only few with cognitive advantage, it is merely old financial elitism in new tech clothing, contrary to claimed inclusive value.

Section 5 Evolving Division of Labor with CBDC

In transition, CBDC’s role is an unavoidable variable. Most likely division: CBDC covers public payments, social-benefit disbursement, personal daily retail consumption; public-chain stablecoins and protocol tokens cover cross-border settlement, open-ecosystem internal pricing, inter-institutional clearing, and asset-liquidity management. The two are not diametrically opposed but play comparative advantages in different scenes. CBDC has state-credit endorsement and legal coercion but is limited in composability and cross-chain interoperability by sovereign boundaries; protocol stablecoins have technical advantage in programmability and global interoperability but lack sovereign credit as backstop. Must also bound: CBDC and most compliant stablecoins anchor sovereign fiat units—digital extension or mirror of state money, not heterogeneous private competitive new units in Hayek’s sense—their value discipline still ties to domestic central bank and fiscal, not independent purchasing-power competition.

Realizing this division depends on policy choice. If regulators allow stablecoins and CBDC to cooperate on interoperability interfaces—for example CBDC entering and exiting stablecoin liquidity pools as optional collateral—the two systems can complement. Conversely, if regulators use CBDC rollout to comprehensively suppress private stablecoins, division will solidify coercively, sacrificing innovative-ecosystem diversity. Bindseil (2024) stresses: retail CBDC if designed as “payment type”—low interest, holding caps, two-tier operation—functions closer to cash extension than full replacement of bank intermediation; lender of last resort remains on central-bank balance sheet; CBDC does not change Bagehot-style crisis-function division, only retail payment carrier⁸. Historically coercively solidified monetary arrangements often form new inefficiencies long-term, spawning substitute demand in institutional gaps.

Internationally, interoperability among multiple CBDCs is larger institutional arrangement. Cross-border CBDC platform pilots—projects such as mBridge—aim to lower cross-border settlement cost and time within sovereign-currency frameworks. If successful, they partly substitute current cross-border stablecoin remittance markets; yet they also demonstrate comparative advantage of on-chain real-time clearing in cost and timeliness, accumulating credibility for the whole protocol ecosystem.

An unexpected cognitive spillover: CBDC popularization may accelerate public understanding and acceptance of on-chain financial tools. Ordinary users paying with CBDC already know digital wallets and chained-ledger basics; jumping from that entry to public-chain assets is far smaller cognitive leap than from zero. State CBDC promotion objectively lowers protocol ecosystem user-education cost—a rare two-way spillover in bilateral game.

CBDC versus protocol stablecoin competition is ultimately competition over user experience and ecosystem convenience, not only technical route. If CBDC user experience is smooth enough and scene coverage broad enough, it may become many users’ first digital-value entry; if public-chain stablecoins keep advantage in composability and cross-chain function, they will keep accumulating users in scenes CBDC cannot serve efficiently. Final division will gradually appear through users’ daily choices via market mechanism, not one policy document’s final word.

Section 6 Regulatory Coordination: From Unilateral Jurisdiction to Multilateral Frameworks

One institutional premise of transition is major economies’ regulatory frameworks gradually evolving toward multilateral coordination. Currently major jurisdictions differ significantly on protocol tokens, stablecoins, and exchanges, often making unilateral decisions affecting global markets. This regulatory fragmentation creates much arbitrage space and accumulates institutional friction.

Ideal multilateral regulatory frameworks should rest on several consensus principles: mutually recognized disclosure standards (whether on-chain data can satisfy certain disclosure obligations), cross-border enforcement data-sharing mechanisms (tracing illicit on-chain asset flows), minimum-common-denominator alignment on regulatory classification (at least preliminary consensus on “what is stablecoin, what is security-type token”). These principles are not unreachable ideals but coordination modes with precedent in traditional financial regulation—Basel Accord alignment on bank capital adequacy offers reference institutional path.

Financial Stability Board, Bank for International Settlements, and Basel Committee already have series of working papers and policy frameworks in this direction, but from principle consensus to member-state legislation usually needs years or a decade. In this transition, industry self-regulatory bodies and technical standardization institutions actually fill coordination gaps, using technical standards instead of legal treaties—this itself concretizes protocol collaboration as institutional form. Ethereum Foundation, Cosmos IBC standards committee, and similar bodies lack legal coercion yet shape participant behavior boundaries through widely adopted technical standards.

Regulatory coordination speed ultimately depends on financial-stability risk magnitude. When protocol ecosystem scale is large enough that systemic risk spillover touches traditional finance, political motivation for regulator coordination truly heats. This is a paradoxical logic: ecosystem must first matter enough for coordination to occur; yet coordination absence constrains sustainable growth. Breaking this cycle requires pioneer countries’ frameworks clear enough to serve institutional templates for others—as dollar clearing system provided de facto anchor for global financial regulatory coordination.

Section 7 The Time Scale of Gradual Migration

Technical full readiness does not mean immediate migration. Historical monetary-institution change offers useful time-scale reference: Bretton Woods establishment and collapse each took about twenty years; euro introduction from treaty to banknote circulation exceeded ten years; credit-card social spread from invention to mainstream coverage likewise took decades. Institution-change speed is constrained by the slowest link—often not technology but supporting legal frameworks, user habit, and political consensus.

Synthesizing legal-clarity improvement speed, user-education accumulation, CBDC introduction rhythm, and institutional adoption scale effects, one can sketch an evidence-based gradual transition picture: current decade, cross-border settlement and inter-institutional clearing are fastest protocol-tool penetration scenes—scale effects and infrastructure maturity will lay foundation in this phase; middle decade, as accounting/tax standards clarify and custody infrastructure matures, enterprise-finance on-chain share will gradually rise; long two-to-three decades, user cognition and regulatory generational evolution will bring on-chain value tools’ social penetration toward today’s credit-card magnitude.

This time scale means transition is long-horizon institutional trend, not speculative short-track bet. Practitioners need neither wait for “perfect regulatory certainty” before acting (that moment may never come) nor presume protocols will replace all fiat within five years (almost certainly not). Real window: build real business in marginal-substitution scenes, layout on gradually clarifying legal tracks, build migratable capability on mature technical standards. This is “protocol thinking” in the time dimension: rules first, execution stepwise, evolution continuous.

Time-scale estimates require humility. Technology’s social spread often shows nonlinearity: long slow penetration then possible rapid jump triggered by key event—as smartphone spread in some regions seemed overnight though base technology accumulated over a decade. For protocol ecosystems, trigger might be major economy issuing clear regulatory framework, major institution adopting on-chain settlement, or major traditional-finance turmoil suddenly highlighting alternative value. Transition timetable uncertainty must be accommodated with strategic elasticity, not replaced by precise timing prediction for directional judgment. Grasp direction, accommodate uncertainty, accumulate real capability at the margin—most resilient strategic posture in transition.

If transition has an endpoint, that endpoint is qualitative change in participation structure—more subjects can create and use value units under transparent rules—not some monetary institutional form declaring final victory.

One dimension often overlooked in gradual transition discussion is human-capital distribution. Protocol ecosystem expansion depends on many practitioners with compound skills: understanding financial-product economic logic, mastering blockchain engineering, designing compliant product architecture under legal frameworks. Such compound talent is extremely scarce globally—a practical bottleneck constraining ecosystem expansion speed. University curricula have not systematically incorporated cross-training in protocol economics and smart-contract engineering; traditional financial institutions’ internal training only beginning to include on-chain assets. Human-capital accumulation cycles are generational—reason transition progress still constrained by talent supply after technology readiness.

Compared with technical-route debate, standardized quality of ecosystem infrastructure will be more foundational factor determining transition speed. Wallet experience, on-chain data readability, contract-interaction safety—these user-facing engineering problems need sustained product and developer investment. Whitepaper ideal design becomes popularization only when ordinary people dare use the product—not stuck in geek circles. Transition speed often depends on whether this user-experience layer can keep pace with protocol evolution.