In a paper published Monday, four researchers at the Federal Reserve bank of New York argue why stablecoins are not the future of payments.
According to the authors, for stablecoins to remain ‘stable’, they are pegged to an asset considered safe, such as the U.S. dollar, thereby unnecessarily tying up assets, which could lead to shortages of safe and liquid assets. They said:
“Tying up safe and liquid assets in a stablecoin arrangement means they are not available for other uses, such as helping banks satisfy their regulatory requirements to maintain sufficient liquidity,”
With about $78 billion in circulation, Tether (USDT) is currently the biggest stablecoin by market cap.
The analysts further note that stablecoins which don’t tie up liquidity, are less risky and less fungible. They argue that stablecoins can be compared to private bank notes issued during the “free banking” era during the mid-18th century.
“Private bank notes were not fungible and individuals handling them needed to consider whether to accept any particular note at face value.”
The paper doubts whether the central bank should use stablecoins if it could issue tokenized deposits, stating
“Recent analysis has emphasized the benefits of maintaining the centrality of banks in the payment system.
While a number of practical details would need to be worked out, the principle behind tokenized deposits is straightforward. Bank depositors would be able to convert their deposits into and out of digital assets – the tokenized deposits – that can circulate on a DLT platform. These tokenized deposits would represent a claim on the depositor’s commercial bank, just as a regular deposit does.”
The study concludes:
“Customers can exchange these deposits for goods or services using well-functioning existing payments infrastructures. Merchants receiving these funds through deposit-based payment systems do not worry about the source of these funds; they transfer at par.”
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Source: Igaming
