Central banks are facing a new, existential threat. It’s not from resurgent inflation, the unwinding of decades of globalised trade, or even populist politics. Rather, according to policymakers, it is a threat to their control over money by the emergence of stablecoins.
In the past month the Bank of England, the European Central Bank and the Bank of International Settlements (the “central bank of central banks”) have all, in chorus, issued stark warnings about the dangers of stablecoins. The ECB has said the instruments threaten Europe’s “monetary sovereignty”, Andrew Bailey, the Bank of England governor, has sounded the alarm over a potential new financial crisis centred on the assets, and the BIS, a usually conservative institution, has issued a blistering attack on the “real societal costs” of what it calls “unsound money”.
What are they all so worried about? Stablecoins are a form of digital currency whose value, unlike volatile cryptocurrencies, is meant to be “stable” because they are backed by a traditional financial asset by at a least a one-to-one ratio. Those safe assets are held in reserve by issuers so users should be able to swap their stablecoin for a conventional currency like the US dollar or the pound.
• Stablecoins threaten global financial stability, central banks warn
Until recently stablecoins have received far less attention than traditional cryptocurrencies like bitcoin, whose seesawing valuations mean policymakers are periodically warning holders about their inherent volatility and need for better consumer protection. But the likes of bitcoin, despite the boom in popularity over the past decade, are nowhere close to being “alternatives” to traditional money or currency. The cryptocurrency world is still plagued by fraud, terrorist financing and the proliferation of Ponzi-style “meme coins”.
Stablecoins are meant to be different. They are designed to offer all the benefits of blockchain-based digital currency — efficient, transparent cross-border transactions and payments — with none of the nefariousness or risk of unbanked digital coins. Central bankers’ panic about stablecoins is nothing new. In 2019 the world’s most powerful monetary institutions and governments sprung into action when Facebook said it would launch libra, later known as diem — a dollar-backed stablecoin for its two billion users to make online payments. This triggered a fierce regulatory backlash in the US, including from President Trump, and led central banks on the path of creating their own digital currencies to prevent users from adopting private forms of money outside the purview of monetary authorities.
President Trump signed the Genius Act into US law in July
FRANCIS CHUNG/UPI/ALAMY
Facebook’s diem project was shelved a few years ago. However, central bankers won the battle but not the war against stablecoins. The landscape for stablecoins is not one dominated by giant tech firms, but thousands of coins and two dominant players — USD Tether and Circle — both backed by the dollar. The stablecoin market is still relatively small at about 8 to 9 per cent of the total crypto industry, but the sector has ballooned to about $250 billion in the last six years. Estimates show it is on course to hit $2 trillion by the end of 2028. Perhaps most significantly for the central banks fraternity is that unlike in 2019, stablecoin adoption is now being promoted by the US government.
Central bankers’ main gripe is about the “singleness” of money being compromised by crypto assets. Central banks and commercial banks can both issue money whose value, be it $1 or $1,000, is underwritten by governments. Stablecoins, which are more than 99 per cent linked to the dollar today, claim to offer the same but there is no such guarantee. Their value does and has fluctuated.
Between 2022 and 2023, there were more than 4,800 instances when stablecoins deviated below par by more than 3 per cent, according to Moody’s, the ratings agency. This is why central bankers devised plans for their own digital currencies — a digital pound or euro — to deliver the same benefits of a crypto asset without undermining this key attribute of “singleness”. Trump’s Genius Act, a landmark piece of crypto legislation, attempts to ameliorate this risk by forcing issuers to hold high-quality backing assets in reserve, like cash dollars and US bonds.
A related and more challenging feature of stablecoins relates back to the Facebook dilemma: the private sector is encroaching on domains which have been the preserve of monetary authorities and traditional banks — issuing currency and payments. This is the sovereignty neuralgia that is most felt by the eurozone, which is going ahead with the digital euro.
In recent years the ECB has been as worried about the likes of US payment giants such as Visa and Mastercard having a “monopoly” on European payments as new entrants in the dollar stablecoin space like Walmart and Amazon. The sovereignty question and reliance on the US has become far more sensitive today as the Trump administration’s promotion of stablecoins isn’t to undermine the reserve role of the dollar, as libra may have done, but instead cement its dominance by creating a huge new source of demand of dollar assets — mainly US Treasury bonds.
• Andrew Bailey warns banks against issuing their own stablecoins
Most stablecoin issuers park their dollars in short-term US Treasury bonds and mass adoption of stablecoins should bring down the federal government’s debt-servicing costs. This is the hope of the administration. But for those outside the US, especially in Europe, the knock-on effect is to steadily dollarise their economies and put the ECB’s “euro moment” even further out of reach. In the words of one ECB adviser: “Such dominance of the US dollar would provide the US with strategic and economic advantages, allowing it to finance its debt more cheaply while exerting global influence. For Europe, this would mean higher financing costs relative to the United States, reduced monetary policy autonomy and geopolitical dependency.”
There are plenty of other under-examined but important consequences for central banks from stablecoins adoption, including potential inflationary impacts and on transmission of monetary policy. If dollar stablecoins lead to higher supply of traditional dollars, this could pose inflationary risks in the US. But it’s not clear whether the adoption of stablecoins will offer an alternative to traditional dollars or displace them. These are all questions that central bankers have yet to confront.
Mehreen Khan is Economics Editor of The Times