Why the whole world should be worried about stablecoins

A few months ago, my son's father-in-law, who lives in New York State, wired a large sum of money to his family in the UK. However, the money never arrived. Worse still, there was no way to trace its whereabouts. His bank contacted the intermediary bank he used, but was told that the receiving bank in the UK—one of the largest banks in the country—refused to respond to any inquiries. I asked my colleagues what might have happened, and they said it might be related to money laundering. Meanwhile, my father-in-law was extremely anxious. Two months later, the money suddenly appeared in his account. He had no idea what had happened in between. This situation was completely different from my previous experiences sending money between the UK and the EU. Remittances across the Atlantic have always been reliable and fast. This is perhaps one reason why Americans are happy to accept "stablecoins" as an alternative to the banking system. Daniel Davies points to two other reasons: first, the cost of credit card payments in the United States is relatively high (about five times that of Europe!), and second, cross-border remittance fees are exorbitantly high. Both reflect the United States' failure to effectively regulate powerful oligarchs. In an article last month, Gillian Tett of the Financial Times suggested another motivation behind the Trump administration's welcoming stance on stablecoins. U.S. Treasury Secretary Scott Bessent faces a dilemma: the U.S. needs the world to hold a massive amount of U.S. Treasury bonds at low interest rates. She points out that one solution is to promote the widespread use of dollar-denominated stablecoins, focusing not domestically but globally. As Tate notes, this would benefit the US government. However, these are not legitimate reasons to welcome dollar stablecoins. As Hélène Rey of London Business School states, “The widespread adoption of dollar stablecoins for payments by the rest of the world, including Europe, is tantamount to the privatization of seigniorage by global participants.” This would be yet another predatory move by a superpower. A more sensible option would be for the US to switch to a lower-cost payment system and reduce its extravagant government spending. But neither of these is likely to be achieved. In conclusion, stablecoins—touted as digital alternatives to fiat currencies, particularly the US dollar—appear to have a bright future. As Tett points out, “Institutions like Standard Chartered predict that the stablecoin industry will grow from $280 billion to $2 trillion by 2028.” The future of stablecoins may indeed be bright. But should anyone other than the issuers, criminals, and the U.S. Treasury welcome them? The answer is no. Yes, stablecoins are much more stable than currencies like Bitcoin. But compared to cash, dollars, or bank deposits, their so-called "stability" is likely just a scam. The International Monetary Fund (IMF), the Organization for Economic Cooperation and Development (OECD), and the Bank for International Settlements (BIS) have all expressed serious concern about this matter. Interestingly, the BIS welcomed the concept of "tokenization," arguing that "by integrating tokenized central bank reserves, commercial bank funds, and financial assets onto a single platform, a unified ledger can fully leverage the advantages of tokenization." However, the BIS also expressed concern that stablecoins might fail to pass the "three key tests of unity, resilience, and integrity." What does this mean? Unity means that all forms of a particular currency must be mutually convertible at equal value at all times. This is the foundation of monetary trust. Resilience means the ability to smoothly conduct payments of all sizes. Integrity means the ability to deter financial crime and other illicit activities. Central banks and other regulatory bodies play a central role in all of this. Current stablecoins fall far short of these requirements: they are opaque, vulnerable to exploitation by criminals, and their value is highly uncertain. Last month, S&P Global Ratings downgraded Tether's USDT (the most important dollar stablecoin) to "weak." This is not a trustworthy currency. Private currencies often underperform during crises, and stablecoins are likely to suffer the same fate. Suppose the US intends to promote loosely regulated stablecoins, partly to consolidate the dollar's dominance and thus finance its massive fiscal deficit. What should other countries do? The answer is to protect themselves as much as possible. This is especially true for European countries. After all, the US's new national security strategy has clearly demonstrated its open hostility towards democratic Europe. Therefore, European countries need to consider how to introduce stablecoins into their national currencies that are more transparent, better regulated, and safer than the stablecoins that the United States may currently be launching. The Bank of England's move appears to be a wise one: just last month, it proposed a regulatory regime for systemic sterling stablecoins, noting that "the use of regulated stablecoins can lead to faster, cheaper retail and wholesale payments and enhance their functionality, both domestically and across borders." This seems like the best starting point at present. The Americans currently in power seem very enthusiastic about the Big Tech creed of "move fast, break the mold." In monetary terms, this could have disastrous consequences. Admittedly, we have reason to utilize new technologies to create faster, more reliable, and more secure monetary and payment systems. The United States certainly needs such a system. However, a system that makes false promises of stability, fosters irresponsible fiscal policies, and opens the door to crime and corruption is not what the world needs. We should resist it.