Stablecoins: Where They Came From, Where They Are Now, Where They Are Going Next
- Future of Finance
- Jun 17, 2023
- 3 min read
Updated: 3 days ago
By providing a source of cash to settle transactions, hold assets and supply credit on blockchain networks, Stablecoins are the crucial underpinning of the digital asset markets. In the last three years, they have come under intense regulatory scrutiny, and are now facing the prospect of onerous regulations akin to those laid on traditional banks – and for good reasons. Several algorithmic Stablecoins have collapsed, costing investors dear. Asset-backed Stablecoins have proved steadier but are plagued by collateral liquidity issues and threaten not only the funding sources of commercial banks but central bank control of monetary policy and financial systems. Yet Stablecoins have also proved a seminal source of innovation. It was Stablecoins which spawned the idea of central bank digital currencies (CBDCs) and daring new solutions to both the high cost of cross-border payments and round-the-clock trading of digital assets. Stablecoins are now set to play a leading role in the gradual convergence of the traditional financial markets and their digital asset successors. Anybody active in modern financial markets – and traditional banks in particular – need to understand where Stablecoins came from, and where they are going, because Stablecoins are poised to revolutionise not just how money is stored and transferred but how it is created. This paper provides that understanding.
Stablecoins may play a role in the future of finance, but absent robust regulatory frameworks, they will introduce significant risks. If developed and implemented under appropriate regulation, Stablecoins have the potential to reduce costs of cross-border remittances; complement and improve existing payments’ infrastructure; provide competition in the payment space; and generate efficiencies when used for more wholesale or back-end functions involving large, regulated entities. However, without an appropriate regulatory framework in place, Stablecoin issuers and arrangements could generate risks to consumers, markets, and—where systemic—financial stability.1
1 International Monetary Fund, FinTech Notes, Regulating the Crypto Ecosystem: The Case of Stablecoins and Arrangements by Parma Bains, Arif Ismail, Fabiana Melo, and Nobuyasu Sugimoto, Note/2022/008, September 2022, pages 38-9
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Foreword
Keith Bear
Fellow, Centre for Alternative Finance, Judge Business School,
University of Cambridge
As we approach the tenth anniversary of the issue of the first Stablecoin, it is obvious that this form of digital money has been growing in prominence, and to an extent in controversy, in recent years. With over $130 billion in market capitalisation, the size and significance of the Stablecoin market cannot be ignored. With size comes responsibility, and today the Stablecoin industry faces a series of challenges which it must overcome if it is to continue to grow.
The first is that central banks are worrying about the impact globally significant Stablecoins may have on their ability to manage monetary policy and financial stability. This concern became clear at the launch of the proposed Libra Stablecoin by Facebook in 2019.
As we approach the tenth anniversary of the issue of the first Stablecoin, it is obvious that this form of digital money has been growing in prominence, and to an extent in controversy, in recent years.
The second challenge is that regulators in all major jurisdictions are worrying about Stablecoins as the vector of contagion from the cryptocurrency markets to the traditional financial system. Central to that concern is just how stable Stablecoins really are, especially in times of stress.
A third challenge is posed by the commercial banks. They are worrying about the increased role that Stablecoins may play in making payments. They are responding by issuing both tokenised bank deposits and Stablecoins of their own.
Finally, the end-users of Stablecoins are not worrying as much as they should about the quality and liquidity of the reserves held by Stablecoin issuers, the independence of the audit of those reserves and indeed their ability to get their money back when markets are chaotic.
The traditional financial economy that has served us for decades is moving to a new digital economy and, whilst digital economies need digital money, it is far from clear yet what form that digital money will take – be it crypto-assets, tokenised bank deposits, central bank digital currencies (CBDCs) or of course Stablecoins, be they issued by banks or non-banks.
So, it is timely to publish an in depth review of the Stablecoin journey from its beginnings, through the role played by Stablecoins in the cryptocurrency economy, to what role they might play in the future digital economy. Future of Finance is to be congratulated for taking on this major task in researching and documenting the evolution of this major asset class. I commend this study to you.
