Stablecoins are no longer a niche experiment. They now have a market value in excess of $300bn, with annual transaction volumes surpassing Visa and Mastercard combined. That momentum is likely to accelerate following the Genius Act in the US, which introduces federal regulation and allows banks to issue stablecoins.
While central banks have been sceptical about stablecoins, they are now recognising the role stablecoins could play. The European Central Bank recently noted the benefits of stablecoins for cross-border payments and said the financial ecosystem of tomorrow will host multiple forms of money. The Bank of England said stablecoins could lead to faster, cheaper retail and wholesale payments as part of a ‘multi-money’ system underpinned by central bank money.
Regulated stablecoins could play a key role in financial markets alongside other forms of money. First, stablecoins are more likely to complement the existing financial system than replace it. This is evolution, not revolution. Second, these risks could be substantially reduced by regulating stablecoins and bringing them inside the central bank ‘safety net’ that underpins confidence in commercial banks.
The solution lies in central banks channelling stablecoin momentum, not fighting it.
Central bank money will still be needed – and stablecoins can complement it
Central bank money is likely to play an important role in the financial markets of the future, just as it does today, because market participants will favour a risk-free settlement asset for some transactions and as a safe store of value.
However, the role of central bank money might change in digital markets. First, much wider availability of atomic settlement provides an alternative way to mitigate settlement risk. In atomic settlement, legs of a transaction are settled simultaneously and conditionally, so that either all legs settle or none does. With atomic settlement, there is no longer such a need to use central bank money to mitigate settlement risk – although market participants may still choose to hold it before and after a transaction as a safe store of value.
Second, the nature of stablecoins as peer-to-peer transferable digital bearer tokens means they may be preferred for some transactions. Cross-border payments are one example, given that stablecoins can move value anywhere in the world in seconds. In contrast, central bank money is likely to be less suitable for cross-border payments given access may be geographically limited and adoption of on-chain central bank money is far from universal around the world.
Stablecoins are also likely to be available across a far wider set of blockchain networks than central bank money. This makes it far more probable that a user can settle a transaction in a digital asset (such as a tokenised security or fund share) with money issued on the same blockchain as that asset. This is an important advantage while interoperability between blockchain networks is still improving.
Finally, digital money is evolving quickly and stablecoins are likely to be better able to keep pace by offering superior functionality. While it’s inherently difficult to predict what form innovation will take, examples might include deployment via smart contracts, as collateral in on-chain finance or privacy features.
Commercial bank deposits and the risk (or not) of disintermediation
Central banks have stated concerns about the risk that stablecoins will ‘disintermediate’ bank deposits. In other words, that market participants will move funds out of banks and into stablecoins, undermining banks’ provision of credit to the real economy and potentially exacerbating market stress events. This has led to calls for stablecoin use to be capped.
The risks of flight to stablecoins in stress has been overstated. In today’s financial markets, there are already similar instruments, which are backed by highly liquid assets – most notably money market funds. These are an established part of the existing financial infrastructure and have not generated significant runs out of the banking system. Other examples include e-money and so-called ‘narrow banks’, which hold customer funds in highly liquid assets including central bank reserves.
The most likely future is one where stablecoins and bank money operate side by side, each used where they are most efficient. Banks themselves may even be major issuers and users of stablecoins, employing stablecoins for intra-group settlements or to streamline cross-border payments.
Integrating stablecoins into the financial system safely is key
Stablecoins are entering the scope of regulation across the world. The European Union’s Markets in Crypto-Assets regime is in force and the UK, US and other jurisdictions like Singapore, the UAE and Hong Kong are advancing their own frameworks. These rules restrict risk-taking, strengthen governance and apply anti-money-laundering measures, making runs and misuse less likely.
But regulation alone is not enough. Stablecoin issuers lack access to the safety net that gives bank deposits their resilience. Without it, even well-managed stablecoins are more vulnerable to shocks – as seen when USDC temporarily lost its peg following exposure to Silicon Valley Bank in 2023.
Central bank tools are crucial in ensuring confidence in the banking system, and yet they are mostly not available to stablecoin issuers. Given the economic benefits of stablecoins, central banks should reflect on how to bring them into the safety net.
A good starting point would be to allow well-regulated stablecoins to deposit part of the backing assets in central bank accounts. This would allow them to hold users’ money safely and reduce the risk of contagion between stablecoins and the banking system. Liquidity insurance should also be offered to reduce vulnerability to market-wide liquidity shocks – like the ‘dash for cash’ in March 2020. Equally direct access to payment systems would remove the risks from tiering and allow for smoother interoperability between stablecoins and other forms of money.
Complementing, not replacing traditional money
Stablecoins won’t replace traditional money. But they will complement it by improving cross-border payments, enabling blockchain-based settlement and increasing the speed and efficiency of collateral flows. With the right safeguards, they can strengthen rather than weaken the financial system.
Central banks have a choice: resist stablecoin technology and watch the market evolve beyond their influence, or bring them inside the tent, shaping stablecoin development with prudential oversight, extending core infrastructure access and integrating it into the next generation of financial rails.
The second path will not just mitigate risk. It will help stablecoins reach their full economic potential and ensure they do so as part of a stable, well-supervised monetary system.
Matthew Osborne is Policy Director, UK & Europe at Ripple.
Join OMFIF and the Wyoming Stable Token Commission on 29 January to discuss the launch of the first US state-issued stable token.
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