April was filled with stablecoin politics, perpetuating the idea of a global race to tokenize cash. In my opinion, this is not a single race – it is a competition in several disciplines. We should be cheering for the right to compete freely rather than for one winner.
Mid-April, US House Financial Services Committee Proposed A bill to regulate fiat-backed payment stablecoins while prohibiting any other banking mechanism and instructing the Fed to study a digital dollar. Fast forward to last week, when Republican presidential candidates rallied against the idea of a digital dollar, calling it a China-inspired surveillance tool.
Dea Markova is a Managing Director and Head of Digital Assets at Forefront Advisors.
In Europe, the European Central Bank (ECB) is losing political support for the digital euro. Nevertheless, the ECB announced last Monday that its testing phase is speeding toward an October deadline. Being ahead of the US and UK, Europe has been forced to confront some tough CBDC questions: Can you roll out a public tokenized tool at scale? What is a viable commercial model? What are the use cases? How is privacy protected?
Although privacy gets tossed around like a political hot potato, the other three questions are, in my opinion, much harder to answer. For the avoidance of doubt, with only a few months left on the ECB timeline, they have not been given a concrete answer.
Also in April, the Societe Generale launched A Euro stablecoin on Ethereum, available for Know Your Customer (KYC) institutional customers and giving them direct access to their locked collateral. The EUR coin will be credit-rated. One day later, the crypto developer community criticized SocGen to embed functions that allow it to empty its customers’ wallets, and which require centralized verification of each transaction — you know, like a bank does.
Read more: Dia Markova – Is Europe’s MiCA a Template for Global Crypto Regulation?
Meanwhile, banks around the world are looking for models to tokenize their deposits in a way that somehow dovetails with KYC requirements and makes sense for deposit guarantees. Bank for International Settlements (BIS) suggested The best way to do this in early April was in two steps.
Step One: Abandon the idea of stable coins as bearer instruments. The argument that “he who holds it owns it” may not work with KYC norms, it said.
Step Two: Mark the deposit through the Wholesale CBDC and replicate the commercial bank settlement system. BIS said that this way you avoid the problem of converting ING Coin to HSBC Coin.
bank of england thinking Tokenized deposits are “regulatory simple” (aka a good thing) and that it is better to have a bank issue stable coins than a separate entity. Pay attention to the latter.
These recent developments are great examples of the strengths and weaknesses of the different types of token money we are seeing emerge. We have four credible options on the table – fiat-backed, nonbank-issued stable coins such as USDT and USDC, fiat-backed bank-issued stable coins such as the Euro Convertible, CBDC and token deposits.
They are all competing for market share, and the race will only get more intense as the contenders mature. Politicians are often tempted to talk of a winner-takes-all scenario. For the ECB, that winner is the digital euro.
I would argue that it is not a race. We are witnessing the “Stablecoin Olympics” with contenders competing in various disciplines. No one is equipped to conquer them all at once.
The disciplines are five: trust, credit risk, interoperability, cyber risk and profitability.
Trust is the Olympic event that CBDCs can most assuredly win. While concerns about privacy and surveillance are raised loudly, the majority of the market would agree that the central bank is the one nation’s institution they trust the most. Nations in which this faith is low are the exceptions. This is why banks in Europe are so concerned that if they could, depositors would keep their savings with the ECB. The ECB, in particular, is also putting a good amount of effort into privacy protections.
Credit risk is a closely related discipline. Stablecoins carry risk wherever their reserve funds are. Commercial banks bear their own risk. CBDCs carry a risk to sovereignty. I would look at this place for credit scoring as a way of predicting who gets the medal.
The interoperability race, for now, goes to private stablecoins. They are the most liquid instruments on the market. Circle, issuer of USDC, Bus launched Also a cross-chain protocol. Most institutional projects use permissioned ledgers, which by definition limit access and interoperability. As the BIS research flags, there are also significant design complexities to interoperability between tokenized deposits.
The cyber attack incident is too close to call. The choice of a ledger, whether open or proprietary, proof-of-work or proof-of-stake, makes all the difference. If security is the ultimate goal then many in the community would argue that the bitcoin blockchain is the most secure. Under EU regulation, both stablecoin issuers and banks will be subject to cyber legislation called DORA. Therefore, the operational resilience safeguards applicable to their technology of choice will be the same.
Last but not least is profitability. A sustainable form of future money must be profitable to its issuers – unless it is a subsidized public utility. In a high interest rate environment, this is less of a problem. Steady currency reserves are, or will be, regulated primarily in government bonds. In a low-interest environment, however, it is currently very easy to see how tokenized deposits could make money on the bank’s fractional reserve model.
Stablecoin Olymp will progress driven by regulatory choices and organizational practices. Some structures are ready to innovate quickly, others are risk averse to manage better. Politics and perception matter for partnership and financial stability. As consumers, our best outcome is access to the tokenized cash market, where we choose our champions based on our use case.
The views and opinions expressed here are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
