A panel at yesterday’s Digital Euro Conference explored the trade offs between stablecoins and tokenized commercial bank money. Jón Egilsson, a former Chairman of Supervisory Board of the Central Bank of Iceland, argued that e-money is a safer option than banks. He made some colorful statements, equating regulated banks to hedge funds and describing central bank digital currencies as ‘nonsense’. There was also some limited discussion about tokenized deposits.
Tokenized deposits are simply a representation of a bank account on a blockchain.
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Banks, stablecoins and stability
Mr. Egilsson noted that the Federal Reserve was founded in 1913 to provide stability and address the issue of bank runs. A hundred and ten years later, the challenge of bank runs persists. The problem is that banks lend out their funds. He’s not the first central banker to raise this issue. Miguel Fernández Ordóñez, the former Governor of the Bank of Spain, previously went as far as saying that banks “are designed to fail“.
In addition to being a former central banker, Mr. Egilsson is the co-founder of Monerium, an issuer of tokenized Euro e-money. Others might call Monerium a stablecoin, a label Egilsson resisted because Monerium is a fully regulated entity, whereas most stablecoin issuers are not. Europe’s MiCA crypto regulations talk about e-money tokens rather than stablecoins.
His view is that consumers have lacked a choice about where they can park their money until recently. Talking about deposits, he said, “You were basically lending money to a bank because you didn’t have a choice.” Today the choice isn’t just stablecoins or e-money but also tokenized money market funds.
Jan Rosam from EY countered that if the argument favors greater stability, then Mr. Egilsson is making the case for central bank digital currency (CBDC). Egilsson responded that CBDCs are ‘nonsense’ because they remove the incentive for the private sector to innovate and service the market. He added that talk of a CBDC is discouraging investors from backing European stablecoin projects.
On the same panel was Peter Left, who heads up Prudential Liquidity Management at Lloyd’s Bank. In other words, he’s responsible for ensuring Lloyds has sufficient assets to meet customer demands.
He spoke briefly about the large liquidity pools that banks hold and that bond and equity holders are bailed in, effectively over-collateralizing the customer deposit liability.
Banks fight back
Mr. Left discussed some of the benefits banks provide, such as loans to buy houses and cars.
Additionally, there’s the issue of consumer protection. “If you make a payment with commercial bank money and it goes wrong, you get protection,” said Mr. Left. “If you make payment with a stablecoin and you send it to the wrong address, no one’s going to give you the money back.”
Emma Landriault from JP Morgan added that stablecoins lack scalability because there is insufficient short term government debt to support large scale payments. Mr. Egilsson rebutted, arguing that e-money should be allowed to be backed by central bank deposits.
He noted that the Bank of England’s current plan for large stablecoins is to have central bank deposits. However, he didn’t mention that these deposits will not earn interest.
We’d add that in China, balances held in Alipay and WeChat Pay mobile wallets are deposited at the central bank, amounting to two trillion renminbi ($278 billion).
Ms Landriault also noted that the transparency of stablecoins exacerbates runs because people can see what’s happening.
Banks and the money multiplier
It’s hard to predict the impact of the current changes on bank deposits. Some of that depends on how fast banks move towards tokenizing themselves. However, if stablecoins, CBDCs, cryptocurrencies or tokenized assets grab a reasonable chunk of deposits, it will impact banks somewhat.
Monerium’s Egilsson believes the shift will be sufficient that “we can eliminate too big to fail banks.” However, he also acknowledged there would be trade offs if the role of banks declined.
“Banks create most of the money in modern societies. And if we are moving in this direction, then that will diminish. Then we have to understand how are we going to make sure that we create the money that we need?” said Mr Egillson.
“This is the discussion that should be happening at the European Central Bank and central banks around the world. This is a big issue. Because, in my mind, it’s inevitable.”
Update: Clarified that Jón Egilsson, is a former Chairman of Supervisory Board of the Central Bank of Iceland, rather than Chairman of the Central Bank of Iceland.
