Stablecoins, a type of cryptocurrency that claims to maintain a stable value by being pegged to another asset, have been criticized by New Zealand’s central bank governor as misleading and risky. Adrian Orr, who heads the Reserve Bank of New Zealand, said that stablecoins are not stable at all, and that they could pose a threat to the global financial system.
What are stablecoins and why are they popular?
Stablecoins are digital tokens that aim to reduce the volatility of cryptocurrencies by being backed by real-world assets, such as the US dollar, gold, or other cryptocurrencies. They are often used as a medium of exchange, a store of value, or a unit of account in the crypto ecosystem, as well as a bridge between the traditional and the digital economy.
Some of the most popular stablecoins include Tether (USDT), USD Coin (USDC), Binance USD (BUSD), and Dai (DAI). According to CoinMarketCap, the total market capitalization of stablecoins is over $140 billion, accounting for more than 5% of the entire crypto market.
Stablecoins have been attracting more attention and adoption in recent years, especially amid the COVID-19 pandemic, which has increased the demand for digital payments and remittances. Some proponents of stablecoins argue that they offer faster, cheaper, and more inclusive access to financial services, as well as a hedge against inflation and currency devaluation.
Why are stablecoins not stable?
However, stablecoins are not without risks and challenges. New Zealand’s central bank governor, Adrian Orr, expressed his skepticism and concern about stablecoins during a parliamentary committee meeting on Monday. He said that stablecoins are “the biggest misnomers” and “oxymorons”, and that they are only as good as the balance sheet of the issuer.
Orr explained that stablecoins are vulnerable to the troubles in the traditional financial world, such as liquidity crises, regulatory actions, fraud, or cyberattacks. He cited the example of Tether, the largest and most controversial stablecoin, which has been accused of lacking sufficient reserves and transparency to back its tokens.
Orr also warned that stablecoins could have the potential to disrupt the real-world markets, as they could facilitate illicit activities, evade capital controls, undermine monetary policy, and threaten financial stability. He said that central banks are “critically concerned” about the impact of independent digital currencies on the global financial system, and that they are no substitute for fiat money.
What is the role of central banks in the digital currency space?
Orr emphasized that fiat currencies, such as the New Zealand dollar, have the power and credibility of the government and the central bank behind them, and that they provide essential stability and inflation control. He said that Bitcoin, the most popular and oldest cryptocurrency, does not fulfill the fundamental roles of money, and that it has other purposes but it is not a substitute for or a complement to central bank money.
Orr acknowledged the innovative potential of blockchain technology, the underlying infrastructure of cryptocurrencies, but he urged caution regarding its application in the financial system. He said that central banks are working to understand and address the potential risks and opportunities of digital currencies, and that they are exploring the possibility of issuing their own digital currencies, known as central bank digital currencies (CBDCs).
CBDCs are digital versions of fiat currencies that are issued and controlled by the central bank. They are different from cryptocurrencies, as they are not decentralized or based on blockchain. They are also different from the existing digital money, such as bank deposits or electronic payments, as they are legal tender and do not require intermediaries.
According to the Bank for International Settlements, more than 80% of the central banks in the world are researching or developing CBDCs, and some of them have already launched pilot projects or trials. China, for instance, has been leading the race in CBDC development, with its digital yuan already being tested in several cities and scenarios.
What is the future of stablecoins and digital currencies?
The future of stablecoins and digital currencies is uncertain and depends on various factors, such as technological innovation, consumer demand, regulatory oversight, and market competition. Some experts predict that stablecoins will continue to grow and diversify, as they offer more convenience and efficiency than traditional currencies. Others foresee that stablecoins will face more scrutiny and regulation, as they pose more risks and challenges to the financial system.
Similarly, some analysts expect that CBDCs will become more widespread and mainstream, as they offer more security and inclusion than cryptocurrencies. Others anticipate that CBDCs will face more resistance and limitations, as they raise more privacy and sovereignty issues.
Regardless of the outcome, stablecoins and digital currencies are likely to have a significant impact on the future of money and finance, and they will require more collaboration and coordination among the stakeholders, including the central banks, the governments, the private sector, and the public.