The Wall Street Journal published a story titled "Stablecoins Are Private Money. That's Why They're a Risk to the Economy," which tells us, "To proponents, stablecoins are crypto's killer app. They will make payments faster and more efficient, especially across borders, than the legacy banking system makes possible. With that promise, though, comes the risk that this could lead to a financial crisis, much like some past experiments with private money. Both the Genius Act, signed into law last year, and the Clarity Act now making its way through the Senate, aim to make stablecoins safer and more mainstream. But no legislation can fully remove risk that is intrinsic to the design of stablecoins. Stablecoin issuers and affiliated platforms are private enterprises driven to increase usage and profit via the assets they hold to back their coins, the 'rewards' they pay to users, and the sorts of activity they tolerate."
Author Greg Ip explains, "Of course, profit and risk-taking are core to how all innovation happens, and that's a good thing. In finance, though, innovation routinely leads to excesses that can lead to a sudden loss of confidence, runs and contagion that spills over to the broader economy."
He says, "Stablecoins back themselves with tangible assets such as Treasury bills that can be sold to redeem coins one for one for dollars. CoinMarketCap puts stablecoins outstanding at roughly $300 billion, led by Tether ($190 billion) and Circle ($76 billion). Stablecoins promised the best of both public and private money: as interchangeable and reliable as dollars but, thanks to the blockchain, faster and cheaper than the dollar-based banking system."
Ip quotes Pablo Hernández de Cos, general manager of the Bank for International Settlements, from a recent speech, "But that promise embodies a contra Stablecoins attempt to import credibility from public money while operating outside the established settlement system."
The piece continues, "Money-market funds are a type of private money, promising to redeem shares at a dollar each, on demand. But during the global financial crisis, one fund couldn't honor that value -- it 'broke the buck' -- because it held devalued assets. A broader panic ensued."
The Journal also states, "The vast majority of stablecoins are linked to the dollar, and those are largely held outside the U.S., often as a means of skirting laws or capital controls. Stablecoins account for 84% of illicit crypto activity such as sanctions evasion and money laundering, according to Chainalysis. Trading crypto remains the primary use of stablecoins. Today, less than 1% of stablecoin usage is for real-economy payments, a Kansas City Fed study concluded."
Finally, they tell us, "Meanwhile, banks are beginning to offer an alternative: 'tokenized deposits,' which they think offer the 'singleness' of dollars with the benefits of the blockchain. Banks, of course, have caused their share of crises, which is why over time they became so tightly regulated and integrated with the Fed. Stablecoins may have to follow the same path."
The BIS comments cited in the WSJ, "Speech at a Bank of Japan seminar," asks, "Why is it important for the central banking community to discuss technological innovation for the financial system today? Innovation is raising fundamental questions about how money adapts to the digital age. It includes tokenisation -- the digital representation of assets on a programmable platform -- which is recognised as having the potential to pave the way for new arrangements in cross-border payments, securities markets and beyond. One such development, emanating from the crypto ecosystem, is the emergence of stablecoins as privately issued instruments that aspire to serve as a new means of payment and borderless store of value."
Hernández de Cos comments, "The emergence of stablecoins has prompted the introduction and development of regulatory frameworks in many jurisdictions. Here in Japan, policymakers have taken a thoughtful and early interest in stablecoins. Indeed, Japan was an early mover with amendments to the Payment Services Act in 2022. Japan's framework has subsequently informed regulatory approaches in other jurisdictions."
He explains, "In my remarks today, I would like to frame the broader debate on stablecoins. I will first discuss the characteristics and current use cases of stablecoins. Then I will reflect on the 'moneyness' of today's stablecoins, meaning the degree to which they function as a means of payment. Finally, considering scenarios that assume broader future adoption, I will point to some of their potential macro-financial implications. In my view, these implications are central when considering how current stablecoin arrangements would need to be improved to serve society."
The BIS comments add, "As I will stress, stablecoins have several potential use cases and offer attractive technological features which can enable integration with smart contracts and faster cross-border payments. However, the market remains small, and structural features -- stemming partly from the nature of public blockchains and partly from design choices -- constrain their moneyness. If widely adopted in their current form, stablecoins would pose policy challenges in several areas, ranging from credit provision to monetary policy. For policymakers, it is key to consider how these challenges might differ from those that arise in today's two-tier banking system. In particular, risks to financial integrity, including investor and consumer protection, and regulatory evasion loom large."
