When Bank of England Governor, Andrew Bailey, laid out a cautious framework for stablecoins in the FT, he struck a balance between innovation and prudence. He acknowledged stablecoins are not inherently illegitimate, but insisted they must operate under conditions that preserve trust. Key among those conditions being:
· strong backing in risk-free assets
· reliable redemption mechanics
· equal treatment in exchange
He also probed a deeper structural possibility, that money could be separated from credit, with banks and nonbanks co-existing in a multi-money system. Reading between the lines, Bailey opened the door to a future in which tokenised deposits and programmable cash become foundational rails. But stablecoins alone are only part of the story - the real transformation could come when tokenised lending, on-chain bond issuance, crowdfunded debt, DeFi capital unlocking, AI-driven portfolio allocation and prediction markets merge in a composable architecture. In that world, money is not simply interoperable, it is intelligent and programmable. Arguably, the role of banks going forward is change. No longer being a one stop shop for deposits and lenders, new FinTech businesses have been created that offer new ways make payments whilst others might reshape the financial architecture and expand the sources of capital and investment opportunities for SMEs, investors and regulators alike. One of the most provocative extensions of Bailey’s vision is to imagine tokenised lending and crowd debt issuance as a parallel pathway to traditional banking credit. If stablecoins and tokenised deposits become widely accepted, small and medium enterprises might raise debt capital entirely on-chain, hence bypassing legacy banks.
Source: Coin Bureau
The recent announcement that a major Chinese bank has tokenised a $3.8billion fund highlights the institutional interest in using blockchain-powered solutions. There are also real-world examples in Europe:
· in the Netherlands, ABN Amro’s SME Takeover Desk offers entrepreneurs financing starting at €250,000. These resemble mini-corporate debt issues via institutional balance sheets.
· Catena Investments, also based in the Netherlands, has provided investment capital to renewable energy projects across the Netherlands, Germany and the UK in tranches up to €2.5 million. Now there is discussion about them being able to offer, using stablecoins, to pay coupons and deploy investment capital - in other words, 100% on-chain funding flows.
Indeed, a recent report from Visa discusses how stablecoins are the engine of a new credit revolution that threatens to disrupt traditional lenders whilst opening global lending to anyone with an internet connection. With $670 billion in on‑chain loans already processed, of which $51.7billion was lent in August 2025 alone, smart contracts now automate rate setting, collateral management and settlement whereby eliminating many of the frictions that make bank lending slow and costly. For incumbent banks, this shift could erode their competitive edge, and credit creation, once the preserve of balance‑sheet lenders, is migrating to decentralised, programmable markets where liquidity moves in real time and costs fall sharply. Yet for smaller investors and entrepreneurs, this transformation is empowering. Tokenised assets and stablecoin liquidity pools allow individuals to lend or borrow in fractional amounts, creating a peer‑to‑peer credit ecosystem once reserved for institutions. Visa’s move to build the infrastructure rather than compete in lending signals that the rails of finance are being rebuilt for inclusivity and constant access. In this new model, the beneficiaries may not be banks at all, but a growing class of digital lenders and retail participants who can finally compete in global credit markets on equal terms.
Imagine an SME issuing an $800,000 tokenised bond, distributed in stablecoin tranches. Investors, retail or institutional, buy slices, receiving coupons automatically in stablecoins. Smart contracts enforce covenants, payments and defaults; DeFi credit and real economy capital converge. This will no doubt be welcomed by SMEs, which are arguably the powerhouse for economic growth in most economies. Indeed, SMEs typically employ over 60% of all employees and account for 90% of businesses in many economies and often struggle to source the finance they need to grow. The four major UK banks (HSBC, Barclays, Lloyds and NatWest) accounted for approximately 40% of the total SME lending in the UK - so already new FinTechs are taking their market share. This architecture could allow credit supply to densify, so eliminating intermediation inefficiencies. It also opens smaller investors (credit unions, community banks, even retail savers) to participate in credit markets that were once opaque or out of reach. Yet this model demands robust governance - vetting borrowers, ensuring collateral, managing default risk and preserving fairness. Token issuance must be backed by legal rights and recognisable recourse in adjudication systems. Still, the potential is transformative: capital markets built for millions, not millions for capital markets. Traditional financial institutions, banks, building societies, credit unions - even post offices often hold large reserves of low-yield assets. These are capital trapped behind regulatory or operational constraints. In a tokenised architecture, capital unlocking mechanisms could emerge:
· these institutions could exchange dormant balances for liquid tokenised assets (stablecoins, tokenised money market funds) that can be deployed or lent in DeFi for yield.
· alternatively, they can lend their capital on chain, securitised through tokens, earning yield while offering liquidity.
· smart contracts can fractionalise their assets, enabling micro-investments, where small investors gain exposure to institutional pools.
This blending of institutional scale and retail flexibility can democratise yield generation.
Crucially, onboarding requires risk controls, transparency and credit modelling that ensures institutions do not cannibalise their core deposit base. An integrated ledger of tokenised money can help maintain systemic stability even as capital flows diversify. As tokenised debt and credit offerings proliferate, the complexity of assessing risk and optimising portfolios will exceed human capacity. That is where AI/machine learning becomes indispensable. An AI engine could ingest borrower metadata, financial statements, on chain signals (token flows, historical repayments), macro indicators and even alternative data (e.g., satellite imagery, ESG data) to generate risk scores or probabilistic default models. It can then create and manage diversified portfolios across tokenised loans, bonds, real estate debt and stablecoin instruments. Investors can stake into AI-curated baskets with automated rebalancing, dynamic risk controls and real-time reporting. The AI layer becomes the backbone of next-gen wealth and lending platforms in tokenised finance, and potentially realises the dream of tokenisation for mass customisation for Larry Fink, CEO of BlackRock (the world’s largest fund manager). Of course, transparency of AI logic, bias mitigation and auditability are essential, especially when such AI determines credit access or interest rates for SMEs and individuals. Another layer of innovation lies in prediction markets (e.g. Polymarket) as tools to harness aggregate crowd wisdom, injecting market-based signals into lending and investment decisions. Consider a scenario where investors can bet on default probability, project success, or interest rates. Before underwriting a tokenised debt issuance, the issuer can publish a prediction market contract asking: “What is the 1-year default probability?” The market’s pricing offers a secondary validation of risk; remarkably, ICE (Intercontinental Exchange) is preparing to invest $2 billion in Polymarket, signalling institutional confidence in prediction markets as serious financial infrastructure. This capital injection could expand liquidity, trust and integration into regulated finance. However, Polymarket faces competition from Kalshi, another prediction company that recently raised $300 million - valuing the business at over $5billion.
By combining blockchain forensics, tokenised issuance, AI allocation and prediction markets, multi-layer risk filtering frameworks can be built that go beyond traditional credit score models and enrich due diligence. However, whilst the promise is grand, several critical challenges and risks demand vigilance, such as:
· legal and regulatory alignment
Tokenised bonds and lending must properly map legal obligations - jurisdiction, recourse and collateralisation. Courts and regulators must recognise on chain rights.
· capital integrity and custody
Tokens must be backed by real value. Baked-in safeguards, audits, custodianship and redemption systems must prevent runs or unbacked leverage.
· overcentralised risk and governance
Even token systems can centralise risk via governance tokens or nodes. Abuse of control, oracle manipulation or token capture can break trust.
· AI bias, false positives and transparency
The AI models governing credit must be explainable. Misclassifying projects or discriminating inadvertently is not acceptable for broad adoption.
· systemic contagion and correlation
If many projects funded on chain fail, it may cascade in crypto markets. This interlinkages with:
· privacy vs oversight tension
As Bailey cautioned, stablecoins in scale must maintain equal terms of exchange and risk-free backing, but also resist turning money into spyware. Techniques such as zero-knowledge proofs, threshold decryption and selective disclosure become essential.
· infrastructure readiness
Payments rails, settlement systems, cross-chain interoperability and identity systems - all must scale before this architecture can function at scale.
Therefore, if this architecture flourishes, the financial landscape of 2030 might look radically different, for example:
· SMEs tapping direct funding from tokenised debt markets
· retail investors deploying micro capital across diversified AI-generated credit baskets
· institutions leveraging latent capital via token swap strategies
· prediction markets influencing credit underwriting, governance and fraud monitoring
· programmable money and tokenised assets operating in symphony under a unified ledger architecture.
In effect, stablecoins would no longer be fringe payments tools; they become the substrate of a new money stack that spans deposit, credit, capital flows and investment. But the fulcrum is trust. As Andrew Bailey framed it, any regime must preserve convertibility, transparency of rules and legal backing. As tokenised lending and capital markets build around stablecoin rails, governance, legal frameworks, risk modelling and architecture must evolve in tandem. The real question is not whether tokenised finance is possible, it is whether institutions will build it responsibly, and whether society will trust that money, now programmable and global, remains reliable, fair and accessible.
This article first appeared in Digital Bytes (22nd of October, 2025), a weekly newsletter by Jonny Fry of Team Blockchain.