Stablecoins Classified as Private Money, Risky for the Economy?
The term ‘private money’ may seem contradictory. In modern economics, currency is typically considered a public good managed by the state. However, history shows the US used private money in the 19th century, and the phenomenon has resurfaced through stablecoins.
Stablecoins are crypto assets designed to maintain a stable value against conventional currencies like the US dollar. Supporters view them as a ‘killer app’ in the crypto world, enabling faster and more efficient cross-border transactions than traditional banking systems.
Despite offering innovation, stablecoins carry financial crisis risks similar to past private money experiments. Currently, the stablecoin market cap stands at around $300 billion (£236 billion), dominated by Tether (USDT) at $190 billion and Circle’s USDC at $76 billion.
The US government has responded with legislative measures. One essential quality of money is ‘singleness’—the principle that a dollar must retain its value consistently wherever and whenever used. Bank deposits uphold this due to Federal Reserve backing as the lender of last resort.
Conversely, stablecoins operate on fragmented infrastructure and often experience minor value deviations. As profit-driven private entities, issuers are incentivised to seek higher returns by holding reserves in riskier assets. If these assets depreciate, user confidence could collapse, triggering a bank run that spreads through the broader economy.
Despite tightening regulations, challenges remain. Many stablecoins operate outside US jurisdiction to evade capital controls. Data shows less than 1% of stablecoin usage is for real economic payments, with the majority used for crypto trading and illicit activities.
Meanwhile, the banking sector is introducing tokenised deposits as an alternative. This innovation aims to combine the stability of traditional dollars with blockchain efficiency.
History shows unregulated financial innovations often lead to damaging excesses. For stablecoins to endure and benefit the economy, they may need to follow traditional banking paths: strict regulation and integration with central banking systems. (WSJ/I-2)