Collateral-aware digital monetary network
The global monetary system remains one of the least understood yet most consequential structures shaping modern economic life. Despite its centrality to financial stability, international trade, and monetary policy, the mechanisms through which money is created, distributed, and recycled across borders remain obscured by institutional complexity and academic neglect. This misunderstanding is especially acute when it comes to the Eurodollar system—a shadowy, offshore network of dollar-based credit creation that operates largely beyond the purview of central banks and regulatory frameworks. In his master’s thesis Follow the Money: How Eurodollars Determine the Flow of the Global Business Cycle, Isaac Halls provides a sweeping analytical narrative that traces the historical origins, theoretical foundations, and macroeconomic consequences of this hidden architecture, arguing that the Eurodollar system functions as an unacknowledged engine of global liquidity and cyclical instability.
The Eurodollar system, a creation of mid-20th century financial innovation, has evolved into a critical yet underappreciated pillar of the global monetary architecture. Emerging originally as offshore dollar deposits in European banks, it expanded rapidly during the post-World War II period, facilitating dollar-based credit outside the purview of the Federal Reserve and U.S. banking laws. Its growth was catalyzed by several geopolitical and economic factors, including Cold War capital flows, regulatory arbitrage, and the surging demand for a reliable medium of exchange in international trade. By the 1960s and 70s, the Eurodollar market had become a vast and liquid funding network, enabling global banks to intermediate U.S. dollar transactions regardless of their physical or jurisdictional ties to the United States. This innovation gave rise to what would ultimately become a transnational, decentralized, and shadow-like monetary system—one that mirrors, yet operates independently of, the domestic dollar system managed by the Federal Reserve.
The scholarly literature on Eurodollars, though limited in mainstream discourse, has seen increasing attention in the wake of the 2008 global financial crisis. Prior to that point, academic consensus largely assumed that central banks could retain control over global dollar liquidity through traditional instruments such as reserve requirements and interest rate policy. Economists like Milton Friedman acknowledged the money-multiplying potential of Eurodollars, describing them as “created by the bookkeeper’s pen.” Yet his views, and those of others such as Paul Einzig or Fritz Machlup, were generally sidelined in favor of models that privileged domestic aggregates like M1 or M2. Post-crisis, however, this complacency began to erode. As the thesis under review by Isaac Halls compellingly demonstrates, scholars and institutional researchers—particularly at the BIS, IMF, and some Federal Reserve branches—have gradually come to recognize the Eurodollar system’s role in both monetary expansion and contraction cycles, collateralized funding mechanisms, and the erosion of central bank transmission efficacy.
Much of the recent work in this area centers around the mechanisms of collateral transformation, rehypothecation, and the rise of repo markets as primary monetary transmission channels within the Eurodollar framework. Researchers like Manmohan Singh, Caitlin Long, and Jeff Snider have emphasized the velocity of pledged collateral as a key variable in credit expansion, analogous to traditional fractional reserve multipliers. Central to their argument is that money is no longer created via reserve pyramiding alone but increasingly through the layered reuse of collateral in global repo and derivative markets. The 2008 crisis, far from being a mere housing bubble or subprime anomaly, was in fact a systemic rupture in the collateral chain—a monetary event in which asset valuations fell, haircuts widened, and the interbank funding mechanism froze. Despite this recognition, policy responses have remained focused on increasing bank reserves and regulatory capital, largely missing the shadow infrastructure where monetary liquidity is truly generated and distributed.
While some progress has been made in understanding the Eurodollar system post-2008, a significant portion of its operations remains misunderstood or ignored. Improvements in collateral management, transparency initiatives (such as the FSB’s data collection efforts), and the emergence of central clearing counterparties (CCPs) for repos and derivatives have helped marginally. Nonetheless, core issues remain unaddressed. Chief among them is the lack of visibility into peer-to-peer transactions, especially those conducted by nonbank financial intermediaries—entities that neither report their positions in real time nor fall under prudential regulatory frameworks. Moreover, the persistence of collateral bottlenecks, compounded by central bank asset purchases that absorb high-quality securities (thus removing them from the system), continues to constrain shadow banking liquidity. These issues are further exacerbated by the absence of a true international lender of last resort for the offshore dollar market.
The evolution of the fractional reserve system is deeply entwined with the development of the Eurodollar framework. Traditionally, fractional reserve banking referred to the practice of banks holding only a portion of their deposit liabilities in reserve, lending out the rest and thereby expanding the money supply. In the domestic U.S. context, this process was constrained by reserve requirements, deposit insurance regimes, and central bank oversight. However, the Eurodollar system took these principles offshore and virtualized them. In this regime, there is often no central bank, no mandatory reserves, and no deposit insurance—yet credit is still created, often by booking dollar-denominated liabilities and assets on balance sheets via double-entry bookkeeping. This makes it akin to a system of global, unregulated fractional reserve banking, where the elasticity of money is governed not by national policy but by the willingness and perceived safety of counterparties to lend against collateral. As such, the Eurodollar system extends the fractional reserve concept into a more abstract and decentralized realm—what might be better termed “fractional collateral banking.”
The key features of the Eurodollar system distinguish it from conventional monetary paradigms. First, it is borderless: banks located in London, Singapore, or the Cayman Islands can create dollar-denominated liabilities and assets without any involvement of the Federal Reserve. Second, it is collateral-centric: money and credit are created and exchanged primarily through the reuse of high-quality securities, not reserves. Third, it is non-transparent: there is no comprehensive reporting of cross-border dollar flows, no centralized registry of rehypothecation chains, and no real-time settlement visibility. Fourth, it is procyclical: during times of optimism, collateral chains lengthen, leverage increases, and credit booms. During panic, these chains contract violently, causing liquidity droughts and price spirals. These features contribute to several structural bottlenecks. Chief among them is the shortage of good collateral, particularly in times of stress, which limits credit creation. Another is the coordination problem: without a unified regulator or central clearing entity, the system relies on decentralized trust, which rapidly evaporates in crisis conditions. Finally, the feedback loop between domestic monetary policy and offshore liquidity is weak and poorly understood, making policy transmission ineffective.
Addressing these systemic vulnerabilities will require theoretical and technological innovation beyond the incremental changes attempted since 2008. Theoretically, the monetary community must abandon the illusion that central banks control the money supply in a globalized, collateral-based system. Instead, monetary frameworks should incorporate collateral flows, repo dynamics, and nonbank balance sheets into their models of liquidity and credit. Practically, the implementation of systemic reforms must hinge on modern technologies that can address the three pillars of the Eurodollar system’s fragility: opacity, fragmentation, and latency.
The convergence of distributed ledger technologies, artificial intelligence, and programmable digital currencies offers the blueprint for a new, coherent financial architecture—a framework that could be aptly described as a “collateral-aware digital monetary network.” Unlike the current patchwork of fragmented infrastructures, opaque practices, and legacy systems, this envisioned network would function as a unified, transparent, and rule-bound environment for global liquidity generation and intermediation. At its core would be a DLT-based infrastructure that records every asset and liability in real time, across both banks and nonbank financial institutions. Tokenized representations of collateral—such as government securities, high-grade corporate debt, or other qualifying instruments—would be traceable through smart contract-based registries, ensuring that collateral usage, pledging rights, and rehypothecation events are fully visible and governed by immutable rules.
Within this framework, smart contracts would not merely automate margin calls or enforce settlement times—they would encode the very structure of acceptable collateral behavior, limiting chain length, tracking velocity, and disallowing multiple simultaneous pledges of the same asset. This automated enforcement would resolve one of the core weaknesses of the Eurodollar system: its dependence on informal, trust-based chains of collateral reuse that are vulnerable to both fraud and sudden seizure during times of market stress. The collateral-aware network would transform trust from an assumed counterparty condition into an embedded technological property of the system itself.
Simultaneously, programmable settlement assets—likely instantiated as wholesale central bank digital currencies—would function as the high-powered money layer within this network. These CBDCs would circulate alongside tokenized private liabilities and serve as the final medium of exchange and unit of account. By settling transactions in real time and eliminating the need for time-lagged clearing mechanisms or reliance on unsecured credit, they would minimize counterparty risk and provide the immediacy needed for collateral-based liquidity markets to function with confidence. Crucially, the CBDC layer would be interoperable with legacy systems during the transition period, ensuring continuity and reducing the risk of bifurcation between the old and new infrastructure.
Such a collateral-aware digital monetary network would not necessitate central planning or a monolithic authority. Rather, it would function as an ecosystem of interlinked protocols, institutional agreements, and algorithmically enforced norms. Its resilience would stem from its design: a system that prevents the uncontrolled multiplication of credit through rehypothecation, that optimizes liquidity based on real-time data rather than bureaucratic inference, and that aligns monetary creation with real-world asset availability and risk tolerance. It would also enable regulatory and monetary policy to become more surgical and dynamic—responding to conditions not with broad strokes of interest rate changes or asset purchases, but with targeted interventions grounded in system-wide intelligence.
The transition to this framework will not be without resistance or complexity. Legal frameworks must adapt to recognize tokenized assets and smart contracts; cybersecurity and data integrity must be guaranteed; and participation must be incentivized globally. Nonetheless, in light of the structural vulnerabilities exposed repeatedly since 2008—and the Eurodollar system’s increasing centrality to global finance—such a reform is not just desirable but necessary.
