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Money may not grow on trees, but stablecoins — digital currencies backed one-to-one by cash and other reserves — might as well. These crypto-like stores of value are sprouting up in all sorts of places.
Open USD, backed by a consortium of businesses including Visa, Mastercard and Coinbase, is the latest splashy launch. And the regulatory environment is adapting to facilitate their growth: even the strait-laced Bank of England has recently eased restrictions on these forms of money. But for all their momentum, stablecoins’ moderate benefits come with a host of drawbacks.
Their main function is as an on-off ramp to crypto trading. In plain speak, people park their money in them while waiting for an opportunity to invest in bitcoin or other digital tokens. Outside of crypto, stablecoins are meant to facilitate quick, cheap and secure international payments. That’s technically true: tokens on a blockchain can cross the world in moments, at minimal cost.
Yet if cross-border transfers before stablecoins are slow, it’s not because of a technological deficit, so much as it is the result of checks and balances conducted by banks to spot money laundering. Stablecoin wallets hosted on regulated exchanges face the same controls.
Still, there is legitimate concern that not all wallets do this well. And users can also store their funds in “self-hosted” wallets that are not subject to scrutiny. Those keen to evade detection can make use of “mixers”, services that make crypto tokens hard to trace.
That leaves digital money open to claims of criminal use. TRM Labs, which monitors online crime, says illicit entities received $141bn through stablecoin wallets last year. It is a fair assumption that considerably more activity has gone undetected, too. For context, McKinsey and Artemis Analytics reckon stablecoins were used in total payments of about $390bn last year. Cash is also hard to track, but why invent a new way to do an undesirable thing?
The second problem with stablecoins is that some have proved less than stable. Even Circle’s USDC, regulated and backed by real safe assets, changed hands for 86 cents on the dollar during the 2023 collapse of Silicon Valley Bank. Stablecoins have no deposit guarantee scheme or central bank lender of last resort — two of the pillars that support fiat currencies.
At the heart of the stablecoin industry is an incentive problem: issuers make money from the return on the assets that back their tokens, so they have an incentive to encourage ever-wider adoption. That’s different from central banks that administer traditional money — much as Beijing or Brussels might like to see their currencies gain stature versus the dollar.
Central bank digital currencies might therefore be a better way forward, providing payment rails linking central banks, commercial banks and citizens. But not all policymakers agree: last year, the Trump administration banned CBDCs outright. It would be a pity if a better solution lost out to one that has managed to create more buzz.
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