Stablecoins show the greatest promise among all cryptocurrencies for improving cross-border payments, but the risks posed to the financial system are too high until clear rules are established, central bankers said.
Stablecoins — cryptocurrencies pegged to assets such as the U.S. dollar or gold — could make international payments cheaper, faster and easier, and they have experienced explosive growth. Over the past two years, the global stablecoin supply has soared more than 1,000% to $182.6 billion as of March 24, data by crypto intelligence providers Coin Metrics and The Block shows.
Stablecoins could serve "a very useful purpose" both in cross-border payments and wholesale payments more generally, John C. Williams, president and CEO of the Federal Reserve Bank of New York, said during the BIS Innovation Summit March 22.
"There's potential here with the technology, [but] we have to make sure that we are not replicating some of the [existing] risks and dangers ... around protection for consumers and investors, but also in terms of financial stability. So you really want to have something that is very safe, very transparent and clearly regulated," Williams said.
With proper regulation in place, there is optimism that stablecoins could improve cross-border payments in future, Cecilia Kingsley, deputy governor of Swedish central bank Sveriges Riksbank, said at the summit. Yet before that happens, stablecoins must be designed in a way that ensures they can properly handle credit, liquidity, operational, cyber, money laundering and other risks that may arise when operating in the financial system, Kingsley said.
No time to waste
The rapid growth of cryptocurrencies is "worrisome" because central bankers and policymakers must stay ahead to mitigate the looming risks, Williams said. U.S. authorities have put a very high priority on regulating stablecoins and taking appropriate legislative action to address cryptocurrency-related issues, he said.
"Regulations need to be continuously adapted," Kingsley said. "We learned a lot from the global financial crisis, but if stablecoins continue to grow unregulated, we could see a similar crisis take place further down the road. So we have to step up here and be ambitious."
The danger with stablecoins stems from the absence of a legal framework that would enable their use as a means of payment and define it in terms of the existing system, said Stefan Ingves, governor of the Swedish central bank, at the summit. The common understanding of money, what it is and what kind of claim one could have on its value, is embedded in existing legislation, which is yet to include stablecoins, Ingves said.
"That's really the issue with stablecoins because if the legal framework is not there, with a fairly high likelihood a stablecoin is an unstable coin," Ingves said. Without rules, what is left is "a wonderful new technology" being used for regulatory arbitrage, he said.
'Get a banking license'
From the rulemakers' standpoint, the way to reduce risks related to the booming stablecoin market is to bring private issuers into the existing regulatory fold. The most recent efforts by U.S. authorities have been focused on getting established banks more involved.
U.S. regulators are particularly anxious to update the existing rulebooks given that blockchain-driven cryptocurrencies pegged to the U.S. dollar account for roughly 90% of the total stablecoin supply, according to Coin Metrics and The Block data.
"The top five stablecoin prices all move together. The market can't even distinguish between them. So eventually, we're going to have to say [stablecoin issuers] are a real bank, and they have to be regulated as a real bank," Gary Gorton, professor of finance at Yale University, said at the summit.
Like banks, private stablecoin issuers require prudential oversight, José Antonio Álvarez, CEO of Banco Santander, said at the same event. The mere fact that the collateral is an outside asset like a national currency requires additional supervision, he said. "Otherwise, we face the risk that someone is cheating the system," Álvarez said.
"One thing we do know is that as human beings, we never learn. If it's too good to be true, you will end up with a problem sooner or later," Riksbank's Ingves said. "If you create something which behaves like a bank, then go and get yourself a banking license."