In a recent study released by the Bank for International Settlements (BIS), stablecoins have come under scrutiny for lacking crucial mechanisms that ensure money market stability comparable to fiat currencies. The study suggests that an operational model granting regulatory control to a central bank would offer superior stability compared to privately issued stablecoins.
The authors of the study employed a “money view” of stablecoins and drew an analogy with onshore and offshore USD settlement to delve into the potential weaknesses inherent in stablecoin settlement mechanisms. According to the study’s findings:
“In both Eurodollar and FX markets, when private bank credit reaches the limits of its elasticity [that is, loses the ability to maintain par], central bank credit steps in, with the ultimate goal of protecting par in global dollar settlement.”
The study points to historical examples, citing the financial crisis of the late 2000s, where the Federal Reserve intervened to stabilize the par value by providing a $600 billion liquidity swap to other central banks. This intervention played a crucial role in preventing a destabilization of the financial system and maintaining the integrity of the global dollar settlement.
The authors emphasize the importance of central banks in acting as a stabilizing force when private credit mechanisms falter, highlighting the need for a similar approach in the context of stablecoins. The study suggests that a stablecoin system with regulatory oversight from a central bank would be better equipped to handle scenarios where the elasticity of private credit mechanisms is exhausted.
While stablecoins have gained prominence as digital alternatives to traditional currencies, concerns have been raised regarding their ability to maintain stability and resist shocks. The BIS study adds weight to these concerns, advocating for a regulatory framework that mirrors the proven stability mechanisms employed by central banks.
As discussions surrounding the future of digital currencies and stablecoins continue to evolve, the study contributes valuable insights into the potential benefits of integrating central bank oversight to enhance the stability and resilience of the broader financial ecosystem.
