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Between attacks on their independence, persistent inflation and AI-powered froth in stock markets, central banks have got a lot on their plate. Another looming worry for central banks: growing interest in digital money — particularly stablecoins.
The number of individual stablecoins in use nearly tripled between the middle of last year and the middle of this year, according to the Bank for International Settlements. The market cap of those stablecoins rose from $125bn in 2023 to $255bn over about the same period. That’s equivalent to about 1.5 per cent of US bank deposits.
As that same BIS report notes, almost all of the total value of the stablecoin market revolves around just two dollar-denominated stablecoins: USDT (issued by Tether) and USDC (issued by Circle). And the ECB has noted that stablecoins are becoming “more entangled with traditional financial institutions.”
On the most recent episode of the FT’s Economics Show podcast, chief economics commentator Martin Wolf spoke to Agustín Carstens — recently departed head of the BIS to get his take.
Despite having once labelled Bitcoin “a bubble,” a “Ponzi scheme” and an “environmental disaster,” Carstens takes a more positive view on some types of crypto. If financial markets would benefit from a more flexible, more programmable currency, central banks should give it to them.
But Stablecoins might not be the answers, Carstens says, for two reasons. First, their stability:
the problem with stablecoins is that to assure [their] stability in an ironclad fashion is extremely difficult.
Second, their “singleness”:
At some point, you might be in a situation where there is an exchange rate between a pound stablecoin issued by person X and the stablecoin issued by person Y. If they’re not back the same, you’ll have an exchange rate between them, and there is no singleness of money . . . a pound issued by a commercial bank or a pound issued by the Bank of England are exactly the same. And that’s due to the role of the Central bank because we have engineered a system where with trust and the action of the central banks, you have the singleness of money.
So if not through stablecoins, how can reserve banks modernise their interbank payments?
what is the most important is the development of a wholesale CBDC, which basically means that bank reserves, or the money that the deposits that commercial banks have in the central banks can be used in a more flexible way, with more programmability that can fulfil all the needs, of the modern technology.
That approach, Carstens says, would maintain the singleness of money. It would also allow them to maintain their hegemony as lenders of last resort; lenders of a unitary currency of known value:
You know that when that book is settled, it is for good. And behind that is the power of the central bank, even to perform as a lender of last resort. You don’t have any of these with the system based on stablecoins.
As Martin Wolf notes, the “ perfectly logical” move to CBDCs would provide “access to perfectly safe money, which would seem highly desirable,” hasn’t happened. Why not?
He and Carstens discuss this question — as well as how emerging markets have become more robust, and why central banks are worth fighting for — in the Economics Show.
The full interview between Martin and Carstens is available here, as is the transcript. Your thoughts are welcome in the FTAV comment box.
