Stablecoins differ from other cryptos
Like Bitcoin and Ethereum, stablecoins are cryptocurrencies, but two key aspects set them apart from the first generation of cryptos. Firstly, stablecoin issuers seek to offer greater price stability by pegging their cryptos to assets such as sovereign bonds or deposits. Secondly, current cryptos have very limited applications, whereas stablecoins can potentially be used on a diverse and global scale. This explains the name "global stablecoins”.
Libra – the best-known example of a stablecoin
Facebook's Libra is the best-known stablecoin initiative. Facebook has developed Libra to make payments more efficient, cheaper and more widely accessible. Cross-border payments in particular still tend to be complex, costly and slow Facebook seeks to achieve this aim by setting up a new payments system for consumers outside official monetary systems. But banks, too, are developing stablecoins, such as the Utility Settlement Coin, under development by an international banking consortium that includes ING, and the JPM coin, developed by JP Morgan Chase. Unlike Libra, these stablecoins are designed for use in the interbank markets, rather than consumer markets. Other BigTech companies are also venturing into payments, such as Apple with Apple Pay, but they have thus far built on existing payments infrastructures.
While we encourage innovation in the financial sector, stablecoin initiatives such as Libra bring a wide range of risks. For instance, there are concerns surrounding money laundering and terrorist financing, tax evasion, privacy, competition and consumer protection. Also, viewed from a central bank perspective, the rise of stablecoins raises questions regarding trust in payment systems, financial stability and monetary policy. In the Netherlands and other euro area countries, the euro is the generally accepted means of payment. As such, it is the foundation of our financial system. Trust in the euro is therefore essential. The successful introduction of a privately-issued generally accepted means of payment on such a wide scale is uncharted territory. Past experience has shown that trust in private money systems can quickly evaporate, thereby undermining the stability of the financial system. Furthermore, stablecoins could diminish the effectiveness of monetary policy, potentially blunting a key macroeconomic policy instrument.
Regulation must be designed at an international level
It is still unclear whether current laws and regulations are sufficient to counter these risks. More information will be needed, including about the legal status of stablecoin initiatives. A key question centres around a holder's claims. Against which entity will those claims be, and what are the relevant parties’ roles and obligations? Only when this information is available will it become clearer what laws and regulations apply, and whether further rules are needed to address the risks inherent in stablecoins. Irrespective of this, the appropriate regulatory framework will need to be designed at an international level. One of the ways in which we contribute to this is by fulfilling an active role in the Financial Stability Board (FSB). To do so, the boundary conditions within which global stablecoins can make a responsible contribution to more efficient payments must be clear, as well as whether current laws and regulations offer sufficient safeguards.
Not only must stablecoins be adequately regulated, their emergence also signals room for improvement in international payment systems. Cross-border payments in particular still tend to be costly and slow. The challenge we face is allowing the market to address current inefficiencies while ensuring that the risks described above remain manageable. Within this context, central banks are increasingly considering issues regarding interoperability, opening times and access to the interbank payment system.
Analysis of digital central bank money
The emergence of global stablecoins also raises the question of whether central banks must issue their own central bank money. Doing so could make payments more efficient and future-proof. Within the euro area, this question will need to be answered by the ECB, and the pros and cons will need to be carefully weighed. We are working alongside our international peers to do just that, and we plan to issue an analysis to inform the debate within the ECB.