Stablecoins have positive economic impact
For a currency to be viable, it must offer enough confidence in its ability to act as a medium of exchange to enable transactions effectively
Stablecoins have broad potential within banking and finance and for the overall economy in processing payments, developing new products, and bridging the gap between physical and digital currency, according to Moody’s Investor service.
However, this type of digital currency also entails new risks that could undermine financial stability and monetary sovereignty if adopted at a significant scale without a solid regulatory and oversight framework, Moody’s warned.
“For a currency to be viable, it must offer enough confidence in its ability to act as a medium of exchange to enable transactions effectively,” the report said. “Unlike highly volatile cryptocurrencies, stablecoins are an attempt to create private digital currencies tethered to a fiat currency or a stable asset that is less volatile while allowing for the convenience of cryptocurrency using instant consensus-based settlement and privacy. Therefore, a stablecoin can be defined as a value-stable digital currency whose market price is backed by a lowvolatility based stable asset.”
What are stablecoins? Stablecoins differ from central bank digital currencies (CBDC), digital representations of the central bank’s legal tender and direct liabilities. In contrast to CBDC, stablecoins are a private-market digital alternative to fiat currency regarding a reliable medium of exchange.
Stablecoin transactions occur without a bank intermediary, enabling instantaneous settlement between transaction parties, regardless of geographic location. They can bring about more competitive economic markets by offering improved efficiency and broader financial inclusion under a regulatory framework and provide new benefits and lower costs to cross-border payment transactions given their ease of use for international money transfers.
The best known stablecoin initiative is Facebook’s proposed blockchain payment system Diem (previously known as Libra), which the company plans to launch later this year. Though several stablecoins are currently in circulation, Facebook’s vast social media network will provide the payment system for cross-border transactions with a significant and large global user base.
Replacing banks, financial services According to Moody’s, if widespread adoption of stablecoins occurs, the development of alternative payment networks using stablecoins could pose disintermediation risks to payment providers and money transfer agents. In addition, competition from stablecoins could also create new risks for commercial banks that issue credit cards and provide cashless payment services to merchants.
These risks include the loss of interaction with their customers and the potential for lower fees than banks, and payment providers receive for processing debit and credit card payments.
It said, “In assessing the role of stablecoins, bank regulators will likely balance the need to make room for societal benefits from technological advances and innovation, including the efficiencies such advances will bring, on the one hand, and safeguarding the stability of the financial system on the other.”
Stablecoins adoption
In the wake of the development of global stablecoins and given potential competition from entities with significant global scale, central banks worldwide are launching or planning to launch CBDC to help reinforce sovereign control over monetary policy. However, by competing with official government currencies, stablecoins could complicate a central bank’s ability to implement monetary policy effectively.
Central banks could also have reason to worry about financial stability. Because private entities manage stablecoins, they are subject to credit and collateral risk, unlike the most widely used fiat currencies. In addition, some stablecoins, because of their unregulated and opaque nature, could also be subject to governance weakness and fraud risk.
In addition, Moody’s pointed out that stablecoins are not regulated instruments and are not subject to reporting or regulated disclosure, which could lead to opacity and risks surrounding liquidity and collateralization. As usage increases, regulators will focus on developing appropriate regulatory and oversight frameworks to address risks that stablecoins may pose to the existing financial market infrastructure.
A primary risk resulting from the adoption of a widely used global stablecoin could be the shift of purchasing power from a “public good” (sovereign money) to a “club good” (payment services offered to a select group of people in exchange for platform membership and personal data), as explained by Fabio Panetta, a member of the European Central Bank’s Executive Board.