Stablecoins: Private-sector quest for cryptostability

Summary:

In just over a decade, the payment industry has seen the launch of cryptocurrencies and their explosive growth, driven by progress in digital technology applications. However, owing to a range of factors, not least their significant volatility, cryptocurrencies have not been adopted on a massive scale, but instead are used largely for speculative purposes. Both national authorities and the private sector have attempted to tackle volatility. The private sector's answer was stablecoins, that is, cryptocurrencies that aim to keep a stable value relative to a specified asset, or a pool of assets. There are currently three means by which stablecoins achieve this: legal assets, crypto-assets and algorithms.

The use of stablecoins may enhance financial inclusion, both in developed and developing markets, and might boost overseas payments in general and remittances in particular. Stablecoins may also have a positive impact on international trade, and may contribute to the development of global payment arrangements. There are potential economic risks, however, stemming either from stablecoins' legal characterisation or from governance matters or the coins' operational resilience. Further concerns are that stablecoins may be used for money laundering or terrorist financing activities, that consumers may not be adequately protected, and that stablecoins may impede monetary policy or propagate financial shocks and generate financial contagion.

To tackle these issues, national authorities in major economies are taking two complementary approaches: having central banks establish central bank digital currencies ('public stablecoins') and regulating stablecoin use. In the EU, the centrepiece is the European Commission proposal for a regulation on markets in crypto-assets, adopted in September 2020 and currently under review by the co-legislators – the European Parliament and the Council.

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