Washington: As privately issued stablecoins continue to encroach on more traditional forms of money — like cash and bank deposits — policymakers will not simply look on from the sidelines.
They will arbitrate, says the International Monetary Fund (IMF).
“Their rules and actions will determine how we will eventually pay for everyday items like a cup of coffee and, more importantly, will affect the structure and risks of our financial sector,” said Tobias Adrian, Financial Counsellor and Director of the IMF’s Monetary and Capital Markets Department, and his colleague Tommaso Mancini-Griffoli who is the Deputy Division Chief.
Stablecoins are cryptographic tokens that can be easily exchanged, benefitting from minimal price volatility relative to cash. Consumers might quickly adopt these new, cheaper, faster and more user-friendly services integrated into their social media platforms.
However, these also come with notable risks that require prompt regulatory action. One possible regulatory path forward is to give stablecoin providers access to central bank reserves.
“This also offers a blueprint for how central banks could partner with the private sector to offer the digital cash of tomorrow — called synthetic central bank digital currency (sCBDC),” said Adrian and Mancini-Griffoli in a blogpost.
Whether stablecoins are indeed stable is questionable. Stablecoin providers must privately generate trust in their liabilities — the very coins they issue. Many do so by backing coins one-for-one with assets of the same denomination.
So if a stablecoin owner wanted to redeem her 10 euro coin for a 10 euro note, the stablecoin provider could sell the assets for cash to be paid out on the spot.
However, much depends on the safety and liquidity of the underlying assets, and on whether they fully back the coins in circulation. It also depends on whether assets are protected from other creditors if the stablecoin provider goes bankrupt.
Regulation must eliminate these risks. One option is to make it mandatory for the stablecoin providers to hold safe and liquid assets as well as sufficient equity to protect coin-holders from losses. In essence, the call would be to regulate stablecoin providers despite them not being traditional banks which will not be an easy task.
Another approach is to require stablecoin providers to fully back coins with central bank reserves — the safest and most liquid assets available.
If stablecoin providers held client assets at the central bank, clients will indirectly be able to hold and transact in central bank liabilities — the essence, after all, of a ‘central bank digital currency.’ In practice, the coins will remain the liability of private issuers and client assets will have to be protected against the bankruptcy of stablecoin provider.
The synthetic central bank digital currency — or sCBDC for short — offers significant advantages over its full-fledged cousin, which requires getting involved in many of the steps of the payments chain. This can be costly and risky for central banks as it will push them into the unfamiliar territory of brand management, app development, technology selection and customer interaction.
In the sCBDC model, which is a public-private partnership, central banks will focus on their core function: providing trust and efficiency. The private sector, as providers of stablecoins, will be left to satisfy the remaining steps under appropriate supervision and oversight, and to do what they do best: innovate and interact with customers.
Whether central banks jump on board at all is another matter. Each central bank will weigh the pros and cons related to payment system stability, financial inclusion and cost-efficiency. To the extent that central banks wish to offer a digital alternative to cash, they should consider sCBDC as a potentially attractive option.
Will CBD turn out to be the central-bank money of the future? “One thing is sure: the world of fiat money is in flux, and innovation will transform the landscape of banking and money. You can bet your bottom dollar on it,” said Adrian and Mancini-Griffoli in their blogpost.