The dangers of stablecoins

Donald Trump said on Thursday that Jay Powell was “one of the most stupid and destructive people, before overtaking the weekend when he added that the federal reserve chair was” a total and complete moron! “The central bankers have rallied around the Fed. The governor of Banque de France, François Villeroy de Galhau, told the FT that Powell” shows admirably what an independent central banker should do: tell the truth and ensure the stability of prices and financial “.

Today, the Bank for International Settlements, the Central Bankers’ Bank, joined the American president with a detailed and very critical analysis of the Stablecoins, Trump’s favorite monetary project. He signed an order in January seeking to promote the development and growth of stablecoins worldwide. And last week, the Senate was massively adopted the law on engineering, which will regulate and legitimate the creation of stablecoin by private entities in the United States. The bis is unhappy.

Mute and destructive

From the extremely prudent and conservative bis, the criticism is fierce. Stablecoins will always be accompanied by a bad substitute for money, he said in a special chapter of his annual report published today.

The company has the choice, concluded the bis. It can modernize payments significantly or descend the road from Stablecoin. If he chooses the latter, “society can relearn historical lessons on the limits of unrelated money, with real societies, taking a detour involving private digital currencies which fail in the triple test of celibacy, elasticity and integrity”.

At the heart of the criticisms of the bis is the question of “celibacy of money”, the concept that a dollar is still worth a dollar, whether represented by a dollar note, in a bank account or at the Fed. By issuing American tickets and cleaning payments between the various banks, the Fed guarantees that we never have to ask if you have a banking dollar from Silicon Valley or a dollar from Bank of America. They are all US dollars.

Stablecoins are cryptocurrency, generally set to the US dollar and supported by American assets. But, as the bis points out, they are not really dollars, so their value is not guaranteed. Instead of having dollars, perhaps intermediary by a commercial bank, you have parties or USDC, which must generally be converted into US dollars if you want to spend them.

As the graph shows, they were not so stable. The data below are annulized and go back to five years, which therefore exaggerates recent volatility, but the point of view of bis on celibacy of money is nevertheless powerful.

Why are the stablecoins thriving?

This is not a case of the law of Gresham, where bad money leads to good, because stablecoins are not perfect substitutes for American dollars. But their growth is strong.

The graph below shows that there are now more than $ 200 billion in stablescoins in the emission – and traffic increases rapidly. Although they are clearly overshadowed by the 18.7 TN of US dollars held in tickets, parts and liquid deposits in the banks, we must ask ourselves why digital assets increase so quickly.

The genesis of stablecoins is that they can serve as bridges towards the crypto-casset ecosystem, which facilitates the investment and collection of various cryptocurrencies, for those who want to do this kind of thing.

But crime is also clearly involved in the growth of Stablecoins. Users can be anonymous and negotiate themselves outside the main exchanges, and the bis calls the stablecoins “go to the choice for illegal use”. There is no guarantee that users follow “to know your customer” or the anti-money laundering regulations. Although species are also used for crime, it is a growth activity for stablecoins, since they are a relatively new game in town.

But it is not only an illicit activity making the stalls attractive. The gaps in existing national and cross-border payment systems in the United States have offered the stables of opportunities to develop. Even if the conversion between stablecoins and fiduciary currency can cost money and systems can be awkward, making legitimate payments is often cheaper via cryptocurrency than the American banking system, as Daniel Davies noted. And digital active ingredients are much cheaper to use in the case of numerous transfers of cross -border money. This poses a serious challenge to operators in current payment systems and shows the advantages of new technologies.

Becoming a supplier of Stablecoins is also potentially attractive. You don’t pay anything for stablescoin holders, or when you invest in short -term American assets by paying more than 4%. Many American companies are considering the opportunity to become a supplier deprived of money in the future. Why, could they ask, taxpayers alone should benefit from the advantages of boring?

The dangers

Of course, the private supply of money is not new. In the era of free bank in the United States, from the 1830s to the 1860s, there were many different forms of US dollars who had a varying success but a regular crisis. The failed model inaugurated the modern system in which central banks are at the heart. Professor Barry Eichengreen of the University of California in Berkeley, said that the Trump’s genius law threatens to bring us back to the chaotic era of the free bank. Simply imagine if short -term interest rates fell again to zero. Private suppliers of Stablecoin could easily make the gap, with costs exceeding yields, which leads to an exodus.

But crime and financial instability resulting from the failure of providers are not the only risks, according to the bis. Without the support of the central bank, Stablecoins could not guarantee to treat very large payments, which the Fed facilitates by being willing to lend unlimited dollars to intraday banks against quality guarantees.

If there has been a quick movement for the release of Stablecoins, they are now large enough to create volatility on the main markets, as in that of short -term American bills. The service providers were the third buyer of cash invoices this year.

The cross -border growth of stablecoins could also undermine the monetary sovereignty of other countries. Large savings with stable inflation are safe, but stablecoins could present risks for developing countries. Although there are advantages in the competition that stablecoins provide, for example undergoing their exchange controls and forcing certain countries to promote monetary and financial stability, the wider threat to monetary sovereignty and domestic economic management.

If it’s not stablecoins, then what?

Payment systems must be modernized to counter the threat of Stablecoin. The bis recommends a system of central bank token which preserves celibacy from money with more efficient national and cross -border transactions. The conceptual phase of its Agora project is over and the bank is heading for a prototype. It will combine the advantages of a tokenized system with existing concepts of commercial money and central bank.

The main advantages would be speed improvements and guarantee that money is not hidden along a chain of corresponding banks because they make the essential checks for money laundering and know your customer. Because it is a wholesale payment architecture and not (officially) a digital currency from the central bank, the Fed is involved and is not prohibited by the Trump administration.

We have to wish bis and central banks. It’s a race against time.

What I read and watched

• The Bank of England and the Fed commented last week on the increase in risks and uncertainty resulting from the conflict between Israel and Iran. With American participation, risks have further increased. But no one wants to quantify them yet.

• The governor of the Fed, Christopher Waller, will have been likely to become a chair without prejudice by calling for American interest rates to lower in July. (At the beginning of 2024, he said that the “worst” thing would be to start reducing rates prematurely and watching data change.)

• The Swiss National Bank has reduced its interest rate to zero.

• France puts pressure on its EU partners to enhance the profile of the euro by issuing debts to support more jointly.

A graphic that counts

Do you remember German hyperinflation in 1923? The standard images that come to my mind are wheelbarrows filled with money, people burn tickets to keep warm and children steal kite worth billions of brands.

These are not false memories, but a new blog of the ECB of David Barkhausen underlines that these are not complete or representative memories. Interestingly, it reveals that it took a certain time to the German collective memory of hyperinflation of the Weimar era to become an edifying story explaining the fear of the inflation of the nation and the desire for tax discipline.

Oral stories suggest that income redistributed by hyperinflation between savers and debtors were therefore not the national collective disaster which we remember now. More revealing, the speeches in the Bundestag which referred to the hyperinflation of the Weimar era generally used it to justify public spending until the 1970s, before politicians began to use the event as justification of the tax discipline. It’s fascinating.

Central Banks is edited by Harvey Nriapia