The global financial system must revise its guidelines for an era of digital assets, as the emergence ofstablecoinsraises new difficulties for the global system of real-time payments, clearing, and settlement, as stated by the gatekeeper of the world'scentral banks.
Digital tokens that are supported by traditional currencies or other reserve assets might complicate anti-money laundering (AML) efforts and the process of banks identifying their clients, due to their cross-border and pseudonymous nature, according to the Bank for International Settlements (BIS), an entity frequently referred to as the "central bank of central banks."
The rules governing the monetary system are evolving, with stablecoins playing a central role in the ongoing policy discussions," stated Shin Hyun-song, BIS's economic advisor and head of its monetary and economic department, during an interview with the Post on Monday in Hong Kong. "[Stablecoin] serves as a borderless tool primarily used as an entry point to the cryptocurrency ecosystem and other decentralized finance platforms, yet it also presents numerous new kinds of challenges.
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The difficulties have been worsened by the attention surrounding the stablecoin company Circle Internet Group, whose share value has increased seven times in a month since June 5.initial public offeringin New York. The Trump administration's support for private digital currencies has causedbitcoinIts value exceeded US$120,000 for the first time, attracting more followers to participate.
The buzz has drawn the attention of regulators such as theHong Kong Monetary Authority, which is showing significant interest, as the city's first stablecoin regulation is set tocome into effect in two weeks.
The BIS has been sounding the alarm regarding the risks associated with stablecoins since the Basel, Switzerland-based institution presented its concept of a common ledger that employs blockchain technology and tokens to unify money and assets into a global system.
Stablecoins represent a method of tokenization, comparable to tokenized deposits and central bank digital currencies, which are the forms of money that the BIS favors in its innovation initiatives.
The extensive use of these instruments, particularly when tied to foreign currencies, may weaken domestic monetary independence, while their significant investment in treasury bills could influence short-term interest rates and market stability during periods of quick capital inflows or outflows, according to the BIS.
These problems may emerge during increased debate about moving away from the dollar and doubts about whether the US dollar can maintain its power and role as a secure investment.
Certainly, the US dollar remains the primary currency supporting the world's $255 billion in stablecoins. Tether's USDT and Circle's USDC make up approximately 90 percent of the market capitalization, which is twice the level seen just two years back.
In another assessment last month, BIS stated that stablecoins were "unsound money" which did not meet the three characteristics of an effective monetary system: "singleness", elasticity, and integrity.
Singleness means that money, in every form, should be valued and traded at equal worth, according to the BIS. The soundness of the monetary system relates to its ability to withstand illegal activities.
"The absence of flexibility in the device might restrict its application to smaller international transactions," Shin mentioned. Stablecoins need to be funded in advance, which is not ideal for supply chain financing, as it would tie up significant liquidity, he noted.
Although there are worries, BIS thinks that stablecoins will have a place in the financial system because they offer an alternative method of tokenization, which is the process of creating a digital version of a physical asset.
Shin expressed that this idea carried "significant potential" as it would naturally lead to enhancements in existing approaches and would open up opportunities for novel forms of economic systems.
It's highly probable that stablecoins will remain, as cryptocurrency isn't expected to disappear anytime soon," Shin stated. "For smaller transactions reaching up to half a million US dollars, stablecoins could still serve a supporting role, provided they are properly regulated.
A situation that the BIS imagines includes addressing the intricacies of supply chains that frequently impede trade growth because of difficulties in confirming that tasks are carried out properly. Through automating these procedures, counterparty risks might be removed, and payments and deliveries could occur at the same time, according to Shin.
"We require a significant shift in the policy strategy, moving from enforcing regulations at the intermediary level to implementing them at the token level," Shin stated.
The approach needs to be "technically viable" and utilize the openness of blockchain transaction records. "We can establish guidelines based on the complete payment history instead of concentrating on specific middlemen," he mentioned.
For example, if a bitcoin is associated with illegal activities, we might give it an AML score, much like how credit ratings assess credit risk.
"Central banks need to take the initiative, as a fragmented private sector effort on its own won't guarantee compatibility," Shin stated.
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This piece was first published in the South China Morning Post (www.scmp.com), a top news outlet covering China and Asia.
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