THE STABLECOINS TRIUMPH AND THE CBDCs DEMISE (PART 1)

Will stablecoins transform the global monetary and financial systems?

Stablecoins have been regulated, and all signs indicate they will become a significant part of the international monetary system. Will their advantages, such as faster and cheaper payments, outweigh their potential problems and risks? Both the US legislation (GENIUS Act) and the European one (MICA Regulation) recognise stablecoins as forms of money, although they are not perfect forms. Goldman and Citigroup predicted that stablecoins will reach a total of $3 to $4 trillion by the end of the decade. Their current total is below $300 billion. For context, consider that total domestic deposits in the US are around $18 trillion, and dollar deposits outside the US amount to about $14 trillion. I will dedicate two or three posts to these issues, as the impact of stablecoins will be widespread in monetary and financial matters. This justifies a thorough exploration of their features, uses, and risks. Meanwhile, Central Bank Digital Currencies (CBDCs) are fading from the horizon of possibilities. The two events are mostly unrelated, and I will dedicate a few paragraphs at the end to explain why this is the case.

Just for enticement, here are some aspects and takeaways from the analysis:

ü Stablecoins will be created mostly linked to the dollar.

ü The success of stablecoins may be less than expected because their use by households and small firms will be limited within national borders.

ü Stablecoins will mainly be used for international transactions among global financial institutions and large firms, and in financial markets when securities are tokenised. Household international remittances will also see widespread use of stablecoins.

ü Stablecoins are an imperfect form of money, without a central bank backstop, and contrary to bank deposits, they are not able to support money creation and do not have any type of multiplier.

ü Large, global financial institutions will be the most successful issuers of stablecoins because of their influence and reputation. Each issuer develops its own stablecoin, but we can expect institutions to promote consortia or the interoperability of their platforms where stablecoins are held and transacted.

ü The vast and crucial “Eurodollar system” (dollars outside the US) with total deposits around $14 trillions will be enhanced by stablecoins, strengthening the dollar dominance.

ü Stablecoins will expand the use of DEFI (Decentralised Finance in blockchains), smart contracts, DvP (Simultaneous Delivery and Payment), peer-to-peer payments, etc

ü ✓ Bank deposits and securities will be tokenised on blockchains, and stablecoins will transform payments and settlements with DEFI.

ü ✓ Monetary policy will be affected as calculating 'monetary' aggregates becomes more challenging, and the medium- and long-term yields of the yield curve will face pressure from new sources of demand for Treasury bonds.

ü ✓ The new regulations reduce the likelihood of instability and fraud in the stablecoin sector, but significant risks of instability and misuse of the new instruments remain. Issuers could be vulnerable to “bank-runs”. Therefore, should Central Banks provide some form of liquidity support to stablecoins? While not currently planned, might crises compel the CBs' intervention?

DEFINITIONS

Stablecoins are created on blockchains, which are software databases using Distributed Ledger Technology (DLT) that records data across a network of computers. Pure decentralised blockchains ensure that each record is immutable, unchangeable, and secured by encryption techniques that protect users' identities, while remaining transparent so that the data recorded can be seen by all participants. Blockchains can be public (open to anyone), private (with restricted access), or permissioned (where participants must be approved). They can also be decentralised (records validated by consensus) or centralised (managed by an organisation).

Tokenisation involves representing real-world assets (such as cash, deposits, securities, and properties) as “digital deposit tokens” on a blockchain. These tokens can be transferred, traded, or used as collateral in peer-to-peer transactions by participants without interference from any entity. Payments and settlements become faster (in real-time) and more cost-effective.

Stablecoins are “digital deposit tokens” on a blockchain that are bought with fiat currency (e.g., dollars), with the stablecoin issuer guaranteeing redemption at par at any time by converting them into the linked currency. To ensure this, the issuer must use the fiat currency received from the stablecoin “sale” to purchase safe and liquid assets, maintaining a one-to-one backing reserve. Therefore, stablecoins are “digital cash” backed by fiat cash, Treasury Bills or Bonds.

Each issuer develops its own stablecoin, resulting in numerous different stablecoins in the market, all pegged to the dollar. They may vary in the credibility of the issuer and could have different values in secondary markets if there are doubts about the existence of sufficient reserves to support redemption at par. Stablecoins can be utilised by various institutions within a consortium. Typically, the most common type of blockchain used is public but permissioned, allowing the issuer to revoke or freeze tokens and monitor participant flows (as seen with stablecoins from Circle (USDC) and Tether (USDT)). This means that the regulatory principle of KYC (Know Your Client) applies to stablecoins, so anonymity is not guaranteed. There must be a certain level of centralisation in stablecoin blockchains, although the immutability of transactions remains intact.

NATURE, ADVANTAGES AND RISKS OF STABLECOINS

Advantages

The main advantages are: 1) real-time, low-cost, secure peer-to-peer transactions within the blockchain platform, both domestically and internationally. 2) When other financial assets are also tokenised, there is potential to use digital smart contracts (self-executing programmes within the blockchain) to ensure, for example, DvP (delivery versus payment) contracts, such as transferring ownership of a group of securities against simultaneous payment with a stablecoin. In technical terms, this is known as atomic settlement, which eliminates execution risk. Many other automatic asset transactions (selling, pledging, swapping, collateralising) in DeFi (decentralised finance) will become feasible as assets are inevitably tokenised. Imagine Repos (a several trillion market) done with DeFi, or securities transactions settled with DVP. This will bring widespread changes across all parts and instruments of the financial system, but these alterations still lie ahead, as asset tokenisation has hardly begun.

Stablecoins as an imperfect form of money

From the definition, we can see that stablecoins can be compared to bank deposits, units of money market funds, or private banks' notes during the XIX century period of free banking. Before recent regulation, the last comparison was certainly the most appropriate one (Gorton and Zhang, 2022) [i]. Even after the regulation, such comparisons may still be made in a mitigated form, as stablecoins are prohibited from offering any interest remuneration, unlike some bank deposits. This will limit substitution incentives and, along with other reasons outlined below, will prevent significant disintermediation of domestic bank deposits, which is somewhat different from what might occur with offshore dollar deposits (“Eurodollars”).

The recent BIS Annual Economic Report [ii], in its Chapter 3, a must-read, focuses primarily on Stablecoins and outlines the three reasons why stablecoins are “imperfect money’: .

1) They do not respect the singleness principle of money, which is maintained by bank deposits with central bank reserves and a backstop of liquidity provision. Unlike cash or bank deposits, stablecoins may have varying values in secondary markets depending on the perception of the issuer's risk in guaranteeing redemption at par. This violates the principle of no-questions-asked acceptance of money highlighted in Bengt Holmström (2015).[iii]

2) Stablecoins do not guarantee the necessary flexibility of liquidity provision to the economy. The BIS Report, already mentioned, refers to the need for “...money being provided flexibly to meet the need for large-value payments in the economy, so that obligations are discharged in a timely way without gridlock taking over.” The current two-tier system of central banks and banks facilitates this by the central bank providing intraday settlement liquidity to banks to enable transaction completion or by supplying central money against collateral of securities. Conversely, banks create new money by granting credit to economic agents, thereby generating deposits that can be used for payments. In contrast, stablecoin issuers cannot create stablecoins by extending credit, as they are prohibited from doing so. They cannot increase the volume of stablecoins independently. It is true that when initially issued against fiat currency deposits, they must allocate their proceeds to build up equivalent reserves in deposits and to purchase liquid securities, whose sellers, if resident, will see their deposits increase. Therefore, initially, the creation of stablecoins will expand the money supply used as a means of payment, but this effect cannot be repeated in the future. In any case, the issuance of stablecoins will not lead to disintermediation unless they purchase the securities required for reserves from foreigners who keep their money abroad.

3) The third shortcoming of stablecoins as a form of money relates to the greater difficulty in ensuring the sector's integrity against financial crime and other illicit uses. Problems of that kind also exist with bank deposit activity, but the supervisory system can manage them more easily than with stablecoin blockchains. Recently, Duffie et al (2025) proposed a solution involving the use of digital identification tokens that would need to be introduced in stablecoin blockchains before they can be used. The digital ID provided by a different issuer would contain features indicating the integrity of the participant, without that data being included in the stablecoin itself. An example would be the use of World ID, a unique, privacy-preserving digital credential and anonymous identifier created by scanning a person's iris using a device called ORB.

We could include a fourth shortcoming related to the risks of financial instability that a “quasi-money” asset without a central bank backstop might cause. Similar to banks, stablecoin issuers could be vulnerable to runs, and if they grow large enough, their difficulties could lead to contagion, threatening systemic stability. This may compel authorities to intervene if the sector expands into the trillions. Central banks, which oppose providing a backstop to stablecoins, might be forced to do so in extreme cases, as occurred with Money Market Funds during the recent financial crisis. Since stablecoins are forms of money without interest payments, it is worth discussing whether central banks should take on a more prominent role in supervising issuers and, consequently, providing some form of backstop. Additionally, as stablecoins denominated in euros face stiff competition from those based on the dollar, should legislation be amended to offer more support to European stablecoins?

All the mentioned imperfections of stablecoins as a form of money involve some costs to society that regulation and supervision may attempt to mitigate, but never fully eliminate. Clearly, this cost-benefit analysis is rarely, if ever, completely carried out in financial matters. Over decades of increasing financialisation of our economies, we have observed that private interests combined with excessive enthusiasm for technological innovations always tend to prevail in the US and are quickly adopted in the rest of the advanced world. Stablecoins have benefits and there are much worse examples in the past: the introduction and widespread use of overnight repos and credit default swaps (especially the naked ones); the complete repeal of the Glass-Steagall Act; the 1995 Basel Accord allowing banks to use internal models for market risk assessment; the 2004 Basel II Accord extending internal models to credit risk; the 2003 decision by the U.S. Securities & Exchange Commission (SEC) permitting mortgage Asset Based Securities (ABS) to be used in repurchase agreements (repos), and the subsequent 2005 changes to U.S. Bankruptcy Law, excluding repos from bankruptcy procedures, thus giving them a false sense of safety. Perhaps this time, regulation and supervision will be enough to prevent stress and instability in the sector.

STABLECOINS REGULATION

The following Table sums up the main aspects of the European and US regulatory legislation.

The two pieces of legislation share many similarities. A common shortcoming concerns the limited role assigned to the central bank in overseeing major issuers. Conversely, some differences could harm euro-based stablecoins. I refer to the proposed standards by the European Banking Authority, which are still awaiting approval from the Commission, regarding a minimum of 60% of reserves held in cash deposits (point 3) and the amount of mandatory capital that cannot be used as part of the reserves maintained by issuers. The first point significantly diminishes the profitability of the entire venture, as issuers' profits are solely derived from the returns on very liquid, secure securities that form part of the reserves. Such thresholds are not present in American legislation.

USERS´DEMAND FOR STABLECOINS

To assess the growth of stablecoins, we need to examine the reasons behind their demand and supply. Regarding household incentives, considering how persistent payment habits for retail purchases are and the total amounts involved, I don’t believe that the advantages of paying with stablecoins are sufficient to persuade people to change their means of payment. The widespread use of online banking and credit/debit cards is quick and, in absolute terms, not expensive enough to justify a switch. Cards offer cashback, travel points, discounts, and other benefits. Payments with stablecoins are immutable, and there are no dispute resolution procedures. These differences are evident in the fact that, in the US, the existence of many different stablecoins has never translated into significant use for everyday household payments. The situation may change if more prominent and trusted banks begin to promote their own stablecoins, making them seemingly usable on phones or cards. However, I expect that, for quite some time, stablecoins will mainly be used by large firms that require substantial payments, which will motivate them to adopt real-time payment instruments that are cheaper than any alternatives.

The other main justification for stablecoins is, of course, their use for cross-border payments, which can be executed in real time and at a much lower cost than existing methods. Global banks, big firms, and even households for their international remittances will become significant users of stablecoins. In any case, it seems that the expansion of stablecoins' use will be gradual and initially at a slow pace.

INCENTIVES FOR STABLECOIN ISSUERS.

The economics of stablecoin issuers are relatively simple. Basically, they earn money because they don’t remunerate their clients’ balances and can generate income from the liquid assets they purchase, hoping it’s more than enough to cover their overhead costs. Large, diversified institutions also hope to sell other services to their client base. For global banks or large asset managers, the international use of stablecoins will create additional lines of business, especially if securities tokenisation spreads more quickly. Large banking institutions may also be prompted to offer stablecoins whenever their competitors begin to do so, as that could erode their deposits if clients want to invest in stablecoins and buy elsewhere. Competition may compel them to introduce the new instrument even if, in itself, it would not be the most profitable activity. In this context, as I have already mentioned, European stablecoin issuers could be at a disadvantage if the EBA technical standards are approved.

In conclusion, we observed that both demand and supply factors suggest a slower growth rate for stablecoins than initially expected. However, technological advancements could potentially lead to an unexpected boost, especially if large banks decide to become quite active in the sector..

End of part 1.

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[i] Gary Gorton and Jeffery Zhand (2023) “Taming wildcat Stablecoins” in The University of Chicago Law Review Vol 90, n. 3

[ii] BIS Annual Economic Report, 2025

[iii] B. Holmstrȍm (2015) “ Understanding the role debt in the financial system” BIS WP n. 479