Money in Harmony: Are Stablecoins the Solution or the Problem?

By  Anton Kryshtal 175 17 May 2023
Photo - Money in Harmony: Are Stablecoins the Solution or the Problem?

The Bank for International Settlements (BIS) has delved into an analysis to determine if stablecoins and tokenized deposits can sustain the concept of monetary unity, which is vital to maintaining the stability of the exchange rate between private and central bank currencies.

As an instance, let's take the national currency of Ukraine. The concept of monetary unity implies that a hryvnia held in any private bank should hold the same value as an officially printed banknote. While this appears to be an apparent fact, stable cryptocurrencies might violate this rule, leading to potential restrictions from the central financial system and critical hindrances to commerce. Hence, the unity rule should be adhered to when creating and using private money. The question then arises: which would work better - stablecoins or tokenized deposits?

In the two models scrutinized by BIS, the issuer guarantees the redemption of tokens at a fixed price, but the rules for transferring them differ. Presently, stablecoins operate like modern bearer monetary instruments (documents substantiating ownership of goods) but do not assure the unity of money. The alternate model prevents tokens from being sent outside of the financial organization, thereby maintaining currency equivalence but also leading to maximum centralization of all processes.

The stablecoin model

The primary issue concerning monetary unity is that when tokens are transferred, they don't actually change the overall balance but only shift secured obligations from one user to another. Therefore, stablecoins behave more like market assets, which can deviate from their nominal value. This has already been experienced with tokens like USDC, USDT, and others during times of negative news, widespread panic, or issues within reserve-holding banks.

Consequently, BIS believes that mere guarantees from the issuer are inadequate, as the token needs to consistently demonstrate value stability. This reasoning holds some merit, as even with sufficient reserves, negative news can cause significant temporary depeg and financial damage.

The tokenized deposit model

These bear resemblance to internal bank stablecoins. In this setup, tokens are not transferred between users; instead, the currency transfer happens at a secondary level via CBDC. Upon receiving funds, the issuer generates new obligations, and the sender destroys theirs. This method eliminates potential credit risks between institutions and preserves the unity of money, as each token is backed by the central currency, similar to conventional electronic money. It could indeed be argued that such an approach could perfectly revamp the current banking infrastructure with its inherent centralization and transaction oversight.

BIS recommendation: Which is the optimal choice?

The Bank for International Settlements advocates for the adoption of a secondary model, concomitant with enhanced oversight of stablecoins and a restructuring of their operational framework. In essence, every token transfer would involve the process of burning followed by the minting of new tokens. This effectively amplifies centralization and introduces a novel commissionary burden for executing smart contracts. Nevertheless, the bank contends that these changes will facilitate the establishment of legally separate obligations for each user.


BIS's proposal seems to be aimed at preserving the control of commercial banks over financial flows. Although new models can be introduced, it should not lead to the outright ban of stablecoins, despite the risks they currently pose.

By implementing appropriate regulations such as increased user accountability, audits, and reserve insurance, the threat of depeg can be significantly reduced without the need for structural changes in their operations. Moreover, fostering healthy competition between private and banking solutions will have a beneficial effect on the entire market.