Stablecoins are gaining a larger role in digital finance, but their growing use does not necessarily make them suitable as a mainstream payment instrument, according to Pablo Hernandez de Cos, general manager of the Bank for International Settlements. Speaking at the annual Jackson Hole economic symposium, he argued that tokenised bank deposits could provide a more credible way to bring the advantages of digital technology into everyday payments while preserving the foundations of the existing monetary system.

His comments reflect an important disagreement over the future of digital money. Supporters of stablecoins, particularly in the United States, see them as a way to make payments faster, expand access to the dollar and strengthen demand for US government debt. De Cos takes a different view, arguing that widespread use of privately issued digital tokens could create problems involving the stability of money, bank financing, financial crime controls and the ability of national central banks to conduct monetary policy.

The debate is no longer mainly about whether stablecoins will exist. They already do, and their use is expanding. The more consequential question is whether they should become a major part of the everyday payment system or remain more specialised instruments within digital finance. De Cos’s position is that tokenised deposits offer a stronger foundation for large-scale payments, although he also acknowledged that this alternative has unresolved technical and legal problems.

Stablecoins face a basic test as money

Stablecoins are privately issued digital assets designed to maintain a stable value against a conventional currency, most commonly the US dollar. Their appeal comes from combining some characteristics of traditional money with the speed and programmability of digital networks. They can potentially be transferred around the clock and incorporated into automated digital transactions.

Their rapid growth has attracted strong support from parts of the US financial and political establishment. US Treasury Secretary Scott Bessent has argued that stablecoins could strengthen the dollar’s international position by creating additional demand for dollar-denominated assets, including US Treasury securities. The argument is that if people and companies around the world use dollar stablecoins, the issuers need reserves to support those tokens, potentially increasing demand for US government debt.

De Cos does not dismiss these potential benefits. His concern is that the economic consequences of stablecoins could be more complicated if they become a major means of payment. A system based heavily on private digital tokens could function differently from the existing monetary structure, particularly if users hold several different stablecoins that do not always exchange seamlessly at exactly the same value.

That issue goes to the principle known as the singleness of money. In a functioning monetary system, different forms of money denominated in the same currency should be exchangeable at par. A bank deposit, for example, is generally treated as equivalent to another bank deposit and ultimately convertible into central bank money. De Cos argues that stablecoins do not automatically provide the same assurance across different issuers and platforms.

Private money could create new financial costs

A major concern identified by De Cos is the effect that large-scale stablecoin adoption could have on banks. Traditional banks use deposits as an important source of funding for loans to households and businesses. If people move substantial amounts of money from bank deposits into stablecoins, banks could lose part of that funding base.

The consequences would depend heavily on how stablecoins are designed and used. If stablecoin issuers hold large quantities of safe and liquid assets as reserves, their growth could increase demand for government securities. But the same shift could reduce the deposits available to banks, potentially increasing their funding costs.

Higher bank funding costs could eventually affect borrowers. Banks could respond by charging more for loans, reducing lending or seeking alternative sources of financing. The result would mean that a payment innovation that appears efficient for users could also alter how credit is supplied to the wider economy.

This is one reason the BIS has been cautious about treating stablecoins simply as a technological improvement. The financial system is interconnected, and moving money from one form to another can change the balance sheets of banks, governments, households and businesses.

The scale of the effect would depend on adoption. Stablecoins used mainly within digital asset markets would have a different impact from stablecoins used routinely for salaries, retail purchases, business payments and international trade. The BIS concern is therefore particularly focused on what could happen if stablecoins become widely used beyond their current specialised applications.

Dollar stablecoins could affect other currencies

The international dimension makes the debate more significant for countries outside the United States. Most stablecoin activity is denominated in US dollars, meaning that wider adoption could increase the practical use of the dollar even in economies whose domestic currencies remain the official means of payment.

De Cos warned that this could weaken monetary sovereignty in some countries. If households and companies increasingly hold dollar-linked stablecoins instead of domestic money, local central banks could find it harder to influence financial conditions through interest rates and other monetary policy tools.

The concern is particularly relevant to emerging economies with weaker currencies or histories of high inflation. Residents in such countries may already have incentives to hold foreign currency as a store of value. A digital dollar stablecoin could make access to foreign currency easier, faster and less dependent on traditional banking channels.

That could produce benefits for individuals and businesses seeking protection from unstable domestic currencies, but it could also increase dependence on the dollar. If domestic transactions increasingly take place using dollar-linked digital tokens, the effectiveness of local monetary policy could decline.

The BIS has previously identified this possibility as a form of digital dollarisation. The potential impact would vary significantly between countries, depending on the strength of their currencies, regulatory systems and financial markets.

Tokenised deposits offer a different model

De Cos’s preferred alternative is tokenised bank deposits. These are not the same as stablecoins. They represent existing commercial bank deposits in a digital form that can operate on programmable financial networks while remaining connected to the established banking and central bank system.

The potential advantage is that tokenised deposits could provide some of the technological benefits associated with blockchain-based finance without creating a completely separate form of private money. They could allow transactions to be automated and potentially settled more efficiently while preserving the existing relationship between commercial bank money and central bank money.

This approach is consistent with broader work already taking place among central banks and financial institutions. Projects involving tokenised deposits and central bank money are examining whether digital ledgers can combine faster settlement with the existing safeguards of regulated banking.

The model also retains the two-tier structure of modern money. Commercial banks continue to provide deposits and credit, while central banks provide the settlement asset that anchors the system. The technology changes, but the underlying monetary relationship remains intact.

For De Cos, that is a major advantage because the purpose of financial innovation should not simply be to make transactions digital. It should also preserve the features that make money reliable and interchangeable.

Tokenised deposits have their own unresolved problems

The BIS argument does not mean tokenised deposits are ready to replace existing payment infrastructure. De Cos acknowledged that they face important questions involving interoperability, governance and legal arrangements.

Interoperability is particularly important because financial institutions may develop different digital platforms. If tokenised deposits can only operate within individual systems, the technology could reproduce the fragmentation that it is supposed to reduce.

Legal certainty is another issue. Digital transactions involving tokenised deposits must establish clear rules over ownership, settlement finality and responsibility when something goes wrong. Financial institutions also need confidence that transactions recorded on digital networks have the same legal status as conventional payments.

Governance could prove equally difficult. A shared digital financial system requires decisions over who controls the infrastructure, who can participate and how technical changes are approved. Those questions become more important when the system handles large volumes of financial transactions.

The BIS therefore appears to favour a gradual approach in which digital technology is integrated into existing monetary structures rather than allowing private digital money to develop independently and later attempting to fit it into the wider financial system.

The dispute is becoming a question of monetary architecture

The growing disagreement over stablecoins reflects two different visions of digital finance. The US argument places greater emphasis on innovation, private-sector development and the possibility that dollar stablecoins could strengthen the international position of the dollar. The BIS approach gives greater weight to maintaining the existing structure of money, particularly the role of central banks and regulated commercial banks.

Neither approach has settled the future of digital payments. Stablecoins continue to attract investment, regulatory attention and institutional interest, while banks and central banks are developing their own tokenised alternatives.

The critical issue will be what happens as adoption grows. If stablecoins remain specialised instruments for digital asset markets and cross-border transactions, the risks identified by De Cos may remain limited. If they become widely used for ordinary payments, their effects on bank funding, monetary policy and currency competition could become considerably more important.

That is why the BIS warning is significant. It does not deny that stablecoins can provide useful technology or specialised payment services. Instead, it questions whether private digital tokens can provide the foundation for a large-scale monetary system without weakening some of the features that currently make money reliable and interchangeable.

The emerging competition is therefore not simply between two payment technologies. It is between two different ways of organising digital money: one centred on privately issued stablecoins and another built around regulated bank deposits connected to central bank settlement. The choices made by regulators, banks and governments will determine how that balance develops as digital finance expands.

(Adapted from cryptotimes.io)

Categories: Economy & Finance, Regulations & Legal, Strategy