The future of the stable coins is Cardonated bank money

The author is a partner of the Dutch law firm Resor

Since the world of decentralized financial system continues to grow, there is a great demand for a digital currency that is suitable for use in blockchain-based applications with a global peer-to-peer billing almost in real time and can be used as a medium.

However, most cryptocurrencies are too volatile and there are also problems with digital central bank currencies. CBDCs must not be based on the distributed LEDGER technology of blockchain or are available for retail. You could only make up for yourself slowly.

As a result, stable coins or e-money tokens have prevailed to meet the requirements of the market.

stable coins are available in many variants. We believe that the only ones who are likely to act as a medium in the foreseeable future that are the most widespread-those who are bound to a Fiat currency, with the issuing reserves. Emitters offer to redeem their tokens on request and claim that they are fully secured by reserves to make this promise.

The tokens that do not pay interest can be used as money in blockchain applications, and trading with them can be handled on a peer-to-peer basis almost in real time. They are not only a medium of exchange, but also serve as security in defi.

The issuers of these stablecoins flourished, while the nominal interest rates were close. With high positive interest rates, the opportunities for keeping interestless stable coins and the issuers lose business.

In the case of clearly negative interest rates, the value of the safe reserves drops, but the tokens are still redeemable. Issuers are faced with bankruptcy and have to invest in risky reserves to survive. If stablecoins are no longer fully covered and widespread by secure and liquid assets, risks for financial stability arise.

assumed that the issuers could pass on their interest income (or if interest rates are negative) to reserves one to one to the token owners. In high interest rates, stable coins are competitive liquid value residues. If they are clearly negative, the liabilities of the issuers shrink together with their reserve; The issuer remains solvent. Stable coins could be sustainable in all interest revenues.

There is a problem, at least for the EU with the Ordinance on Markets for Crypto-Assets (Mica), which is expected to come into force in 2024. This prohibits the interest of money tokens. That would force issuers to adopt a business model that is only sustainable with interest.

We see no reasonable reason for the ban, but such regulation will force stable coins for further development. An alternative could be shares in a regulated money market fund for private investors, which are output as security tokens on a public blockchain in accordance with the applicable securities laws. Like stable coins, they would be bound to a unit of the Fiat currency, but would pay interest.

such as money market funds that aim to maintain a constant net inventory value, they run the risk of fulfilling themselves if investors hurry, sell token, which triggers further sales. As a result, you should have access to Lender-of-Resort facilities of the central bank such as money market funds. This type of fund is located outside of Mica and is allowed. However, it is significant that you have to handle mica to design a stable stable coin.

tokenized deposits offered by commercial banks are another option. Banks would manage deposits in a distributed database instead of their own. These are legally and economically identical to conventional insoles; They do not fall under mica and can pay interest.

The tokenization of deposits would enable peer-to-peer processing and make the money from commercial banks usable in blockchain applications without affecting the broader financial system.

Ticking business bank deposits has advantages over alternative stable coins. You can fall under existing deposit guarantee systems and are considered a legal means of payment in some legal systems. After all, the banks have access to the central bank as the lender of the last instance; Expansion of the scope of the assets in which the fund owners' funds can be invested while maintaining sufficient liquidity.

Interest from zero

deviates from zero, stable coin emitters are likely to apply for banking licenses to benefit from the regulatory advantages. Existing banks will likely introduce tokenized deposits to be competitive. Stable coin emitters will probably only be a temporary appearance as intermediaries. What remains is commercial bank money with an extended technical functionality.

Willem Buiter and Anne Sibert wrote this article together