Discussion of stablecoins has exploded among policy-makers and payment system incumbents since the election of US President Donald Trump.
Use of the instruments has been growing steadily for several years but remains confined primarily to trading pairs with cryptoassets and for use in cross-border payments by those who prefer not to or are unable to access the traditional banking system. The speed, cheapness and broad accessibility of stablecoins makes them a potentially powerful and transformative payments system, even before considering their possible importance as a means of settling the cash leg of tokenised securities transactions.
But as yet, stablecoins are effectively siloed off from the rest of the payments world. Only a small minority of people have wallets capable of holding them and few merchants will accept them. For most people, spending a stablecoin on goods and services means using a cryptoasset exchange, selling into an order book where the price they receive will vary with market conditions and liquidity. Major market players can redeem their stablecoins – convert them into commercial bank money – with the stablecoin issuer, but nobody can do this with their bank.
From an accounting perspective, stablecoins are treated as financial instruments, rather than cash equivalents. Unless this can be changed, their use as a payment instrument will remain limited.
Rethinking stablcoins
Tony McLaughlin, while at Citi, was the originator of the Regulated Liability Network – an architecture for a vision of the payments system based on tokenised versions of central and commercial bank money on private, permissioned blockchains. The RLN was an immensely influential project, spawning a US version known as the Regulated Settlement Network and heavily influencing the architecture of the Bank for International Settlement’s Project Agorá.
But following Trump’s election, McLaughlin believes that the future of payments will be run on public blockchains. Although some regulatory hurdles remain before banks can interact with public blockchains, there is political momentum for these hurdles to be overcome and for banks to begin working with blockchain-based instruments like stablecoins.
Ubyx, McLaughlin’s new initiative, aims to deliver this by creating a clearing system for stablecoins. McLaughlin explains the concept with a cheque analogy, pointing out that all 4,500 or so banks in the US are happy to accept cheques drawn on any of the other banks without needing to have a direct relationship with that bank. This happens thanks to the cheque clearing, which carries instructions from the receiving bank to pay the issuing bank, allowing the recipient of the cheque to receive the amount promised in their own bank account at par.
‘A $100 cheque drawn on the fourth bank of Kentucky is the same as $100 drawn on JP Morgan as long as you can in actual fact deposit those cheques and get par value from your own bank,’ he said. ‘The way that actually works is your bank does not have a relationship with the fourth bank of Kentucky. Your bank sends that cheque through the cheque-clearing system, which is a machine for claiming the money from the fourth bank of Kentucky.’
‘I ask you to make the following substitutions: rather than the fourth bank of Kentucky, there’s a stablecoin issuer. Rather than the US Postal Service, there’s a blockchain. Rather than there being a physical piece of paper, there’s a digital token that represents the claim on the issuer.’
McLaughlin posits a simple exchange where, as part of their service, banks offer their customers a stablecoin wallet. People can send stablecoins to that wallet and the recipients can either keep the stablecoins or receive a deposit into their bank account at par. A public blockchain system would carry the instructions from the recipient’s bank to the issuer of the stablecoin, who would accept the stablecoin tokens and the recipient’s account would be credited with commercial bank money from the issuer’s pre-funded account.
By ensuring that stablecoins can be converted into commercial bank money at par, this satisfies a major concern of central banks: preserving the singleness of money and avoiding a ‘wild west banking era’ situation where money from different issuers is only accepted at discounts. Solving this challenge is key to allowing stablecoins to be treated as cash-like instruments and paves the way for stablecoins to grow into a fully-fledged payments instrument.
McLaughlin joined OMFIF’s podcast to give exclusive insights into his new Ubyx initiative. You can also read more about this subject in McLaughlin’s white paper.
Lewis McLellan is Editor, Digital Monetary Institute, OMFIF.
OMFIF has created a working group to explore the topic of updating bank regulations to fit with public blockchains. Learn more here.
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