Stablecoins are the privatisation of money. They have the potential to:
- • Disrupt traditional banking systems. They can suck deposits out of the banking system leaving significant funding gaps for banks and the “real” economy.
- • Grow in size to a critical level (say US$ 5 trn) where they create systemic risk if there is a crisis due to their backing by US Treasuries •
- Cause dollarisation and loss of economic and political sovereignty in emerging and developed countries.
- • Diminish the power of central banks (deterioration of monetary policy transmission) by privatising creation of money.
- • Monetise fiscal deficits and sovereign debts so lifting constraints on politicians •
- Be easily weaponised for political ends.
- • Play a key role in the arsenal of populist states seeking to centralise power and to reduce the checks and balances provided by independent institutions such as the judiciary and central bank.
The advantages of Stablecoin could largely be incorporated in tokenised deposits offered by banks & tokenised money market funds. But these developments lag.
There are factors which may curtail the rise of Stablecoin such as:
- • Being an inferior form of money. • Flawed regulation. • Inherent risks that may reduce their asset backing below par.
- • The current inability to offer holders a yield compared to tokenised bank deposits or MMFs.