Representatives of the Bank for International Settlements (BIS) conducted a comparative analysis of stablecoins and fiat currencies. In short, the stablecoin market needs a unified ledger and global regulation by a central bank or a similar structure.
The BIS analysts published a report “On par: A Money View of stablecoins,” which aimed to identify weaknesses in the settlement mechanisms used in stablecoins compared to domestic and offshore settlements in U.S. dollars. The study’s key finding was that an operating model in which regulation is handled by central banks is superior to a model based on private lending entities.
According to analysts, stablecoins lack crucial mechanisms that guarantee the stability of the money market in fiat currency. In particular, it’s about loans that the central bank issues to private banks during financial destabilization. The report cites the situation resulting from the 2008 financial crisis as an example. At that time, the Federal Reserve provided $600 billion in liquidity swaps to other central banks, providing demand for withdrawals and supporting the nominal value of the U.S. dollar.
Stablecoins, in turn, are backed by means of reserves in fiat currencies and securities, digital assets, and algorithmic trading protocols. The main drawback of this system, researchers say, is the misperception that the solvency of stablecoin issuers (the ability to meet long-term demand) comes at the expense of liquidity (the ability to meet short-term demand).
Moreover, much of the reserves that provide value to stablecoins represent the “equivalent value of short-term safe dollar assets” that are inevitably tied to the paper money market. Consequently, the stability of stablecoins is closely linked to current economic conditions. However, while the traditional financial system has mechanisms that help maintain bank liquidity during economic crises, stablecoins lack such mechanisms.
As a conclusion, the BIS analysts recommend using the Regulated Liability Network (RLN) to create a “fully-fledged banking system” for stablecoins based on a single ledger, which should include a central bank as a regulator. This would allow stablecoins to gain trust from institutional investors, something that private stablecoins lack today.
In July this year, the proof-of-concept phase within the work on the Regulated Liability Network (RLN) was successfully carried out by specialists from the Federal Reserve Bank of New York’s New York Innovation Center (NYIC) with the participation of SWIFT and nine major financial institutions. In September, the U.K. authorities announced plans to start pilot testing of the digital pound using the RLN infrastructure.