As part of the G20’s plan to improve cross border payments, the role of new payment infrastructures is being explored. These include new multilateral platforms, global stablecoins and central bank digital currency (CBDC). Today the BIS Committee on Payments and Market Infrastructures (CPMI) published its paper on stablecoins.
It is one of the more painful BIS documents to read. That’s because the authors appear extremely concerned that readers might think they’re recommending stablecoins. Hence, they go overboard in pointing out stablecoin drawbacks. Often and repeatedly. And even while trying to outline potential benefits.
The tone is reminiscent of central banker responses to Facebook’s Libra / Diem stablecoin project. And the concern about stablecoins being deployed by BigTech is explicitly mentioned in the document. Ironically, one of the suggestions for future work is to explore multi-currency stablecoins, which was Libra’s first suggestion.
Do drawbacks outweigh benefits?
Reluctantly, the paper acknowledges it’s possible that stablecoins might cut costs, speed up payments, encourage competition and improve transparency. However, the list of drawbacks is a long one.
Three times the paper states that drawbacks could outweigh potential benefits. “In order to address these challenges, the regulation, supervision and oversight of SAs (stablecoin arrangements) alone may not be sufficient to mitigate such risks.”
One issue highlighted is the currency used. If a country has a solid currency, consumers prefer to use the domestic currency for cross border payments. If the jurisdiction has a weak economy, then a foreign currency stablecoin will likely prove attractive. But if users adopt the foreign currency that could result in currency substitution in emerging market economies, making capital flows unpredictable and policy harder to implement.
Another issue is the challenge of on and off ramps. These are likely to fall into two camps: banks and in-person money changers in emerging markets. The report notes that in some jurisdictions, banks are not allowed to act as off-ramps. And stablecoins need to be sufficiently large for in-person money changers to want to participate.
On the other hand, if a stablecoin is sufficiently widely accepted, the need for offramps is not so pressing. That’s because people are happy to keep it for future payments. However, if a stablecoin is big, it’s likely to be a systemic stablecoin which is a monopoly or oligopoly. And that level of success presents financial stability risks.
Meanwhile, in January the CPMI published a report on multilateral platforms to address cross border payment frictions as part of the G20 work.