Smets on anchoring trust in money beyond stablecoins
Frank Smets, Acting Head of the Monetary and Economic Department at the BIS, discussed preserving trust in money in the digital age. He highlighted the need to address stablecoin weaknesses and integrate tokenisation into the trusted two-tier system anchored in central bank money.
Trust in the digital age
Digital innovation is rapidly reshaping the monetary and financial system, introducing private tokens like stablecoins that aspire to money-like functions.
This raises a fundamental question: how to preserve trust in money in the digital age.
The established two-tier system, combining central bank money with private sector services, has historically provided this trust through sound institutional arrangements ensuring par redeemability, elastic liquidity, and integrity.
Yet, the current system faces challenges such as fragmentation, rising costs, and operational risks.
Innovations like distributed ledger technology (DLT) and tokenisation aim to overcome these frictions by embedding money and assets in programmable environments.
Stablecoins emerged in this context, promising fast, programmable transfers on new rails, including for cross-border payments, by leveraging trust in fiat currency.
Stablecoins: Limited reach, high risks
Stablecoins are mainly confined to on-chain crypto trading, with a limited $320 billion market capitalisation, concentrated in two USD-pegged coins.
They suffer from pseudonymous transfers, complicating illicit finance prevention, and frequent price deviations from par during stress.
The underlying public permissionless blockchains create congestion, fragmentation, and governance challenges, leading to siloed tokens and undermining network effects.
To function as money at scale, stablecoins require robust regulation: par redeemability into central bank money, ring-fenced high-quality reserves, and credible backstops.
Without these, they should be regulated as security-like products that track reference assets.
A two-track future for money
Widespread stablecoin adoption carries significant macro-financial risks, potentially weakening bank liquidity, raising funding costs, and transmitting financial stress.
Cross-border use further raises dollarisation risks, threatening domestic monetary policy autonomy.
Therefore, a two-track policy is essential: strengthening stablecoin safeguards while integrating tokenisation into the trusted central bank-anchored system.