Global stablecoin surge highlights overlooked risks in crypto finance

In May 2023, Australian economist Paul Sheard published a book, The Power of Money, explaining how governments and banks create money. Things have moved on since then in the world of cryptocurrency, and it is the little understood international politics of money that need clearing up now. Public interest continues to centre upon instruments such as bitcoin and its cryptocurrency imitators, whose huge price swings attract headlines. These are not currencies, however, but “risk assets” as Sheard noted during a recent event at the Foreign Correspondents’ Club of Japan in Tokyo. The focus should be upon developments in the United States, China, Japan and Europe, where the battle for currency domination is accelerating via the issue of stablecoins – a private-sector cryptocurrency whose value is pegged to another asset, typically a fiat currency – and also central bank digital currencies (CBDCs). Both innovations could influence the global balance of currency power as well as domestic economic issues. Pilot programmes in the use of stablecoins are spreading across the Asia-Pacific. Interest is also growing in CBDCs, with the region becoming a centre for digital payments innovation, Tobias Adrian, director of the International Monetary Fund’s (IMF) monetary and capital markets department, said during a seminar in Tokyo last week. The politics of cryptocurrencies are intriguing. Bitcoin and other such instruments came into the world with their innovators wishing to bypass the existing system of sovereign currencies because they distrusted governments and central banks. By using blockchain technology to enable fast and cheap financial transactions instead of bank-to-bank exchanges, the belief was that such obstacles could be overcome. Instead, holders of bitcoin and similar digital assets found that the value of these instruments was wildly volatile, even though their restricted issuance seemed to promise stability. Stablecoins linked to collateral holdings of US dollars and other sovereign securities seemed to provide an answer, even if they shifted control of monetary policy from official authorities to corporate and financial entities. The fact that stablecoin holdings could be moved more or less freely across national borders alarmed governments and central banks. They responded by devising CBDCs, which are direct liabilities of the issuing central bank and therefore safe, in theory. The various cryptocurrency instruments are now in a competition with the legacy currency system. The politics around digital currencies have extended into the long-running battle for supremacy between the world’s major currencies. Through legislation and his family’s business activities, US President Donald Trump is promoting the development of US dollar-backed stablecoins to ensure the continued dominance of the US currency. Nine leading European banks have joined forces to launch a euro-denominated stablecoin, which, according to ING, “aims to become a trusted European payment standard in the digital ecosystem”. Perhaps with an eye towards preventing premature internationalisation of the yuan, the Chinese government has taken a cautious stance on stablecoin issuance while observing Hong Kong’s experiments in this arena. Meanwhile, Japan is taking a more active approach as it views the global spread of the yen as something that should be encouraged. Japan’s Financial Services Agency announced on November 7 that it would support a pilot project by three major banks – Mizuho, Mitsubishi UFJ and Sumitomo Mitsui – to jointly issue stablecoins. This came shortly after Japanese tech start-up company JPYC launched the world’s first yen-backed stablecoin. Tommaso Mancini-Griffoli, assistant director of the IMF’s monetary and capital markets department, said during a presentation at the Tokyo seminar that 91 per cent of 93 central banks surveyed last year indicated they were exploring CBDCs. An April 2024 report from a meeting between the Bank of Japan and multiple government ministries noted that “many economies have been studying retail CBDC (general-purpose CBDC) for individual and business users while a few, including the Bahamas, have officially introduced it”. Interest in stablecoins is surging around the world amid their promise of faster, cheaper payments and a wave of financial innovation. At the same time, however, their spread is accelerating concerns about their effects on global financial systems. In a commentary for Project Syndicate, Angus Armstrong, chief economic adviser at Lloyds Banking Group, and Dennis J. Snower, president emeritus of the Kiel Institute for the World Economy, warn that “stablecoins don’t just disrupt monetary policy; they also reshape fiscal dynamics. Every dollar of stablecoin issuance translates into more demand for government debt. As automatic buyers of Treasury bills, stablecoin issuers are creating a captive market that suppresses yields”. Meanwhile, the European Systemic Risk Board noted in a report last month that “forceful US policy measures” were supporting the mainstreaming of cryptocurrency assets, including stablecoins. “Amid a fragmented global regulatory landscape, US crypto policies seek to strengthen the dollar’s dominance by promoting the development and adoption of USD-denominated stablecoins worldwide,” the report said. The report expressed concern about the growing links between the cryptocurrency and financial sectors, underscoring “the urgent need to introduce safeguards against financial stability risks through enhanced supervisory measures, legislative reforms and closer international cooperation”. It singled out stablecoins’ “spillover risks due to their rapid growth, their steadily increasing ties to traditional finance through backing assets and the risks associated with a potential growing role in payment systems”. The wild swings in value and potential risks to global financial stability have not dampened enthusiasm for cryptocurrency and other digital assets. As such, greater public education on these systems and their risks is necessary before they fully go global.

Global stablecoin surge highlights overlooked risks in crypto finance

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}The politics around digital currencies have extended into the long-running battle for supremacy between the world’s major currencies

The politics around digital currencies have extended into the long-running battle for supremacy between the world’s major currencies