They also entail new risks that could undermine financial
stability and monetary sovereignty if adopted at a significant scale without a
strong regulatory and oversight framework. In this report, we answer frequently
asked questions about the risks and opportunities related to the growth of
stablecoins.
What are stablecoins, and how do they differ from
cryptocurrencies and central bank digital currencies (CBDCs)? For a currency to
be viable, it must offer enough confidence in its ability to act as a medium of
exchange to effectively enable transactions.
Unlike cryptocurrencies, which are highly volatile,
stablecoins are an attempt to create private digital currencies tethered to a
fiat currency or a stable asset that is less volatile, while allowing for the
convenience of cryptocurrency by means of instant consensus-based settlement
and privacy.
Therefore, a stablecoin can be defined as a value-stable
digital currency whose market price is backed by a low-volatility based stable
asset. Stablecoins also differ from central bank digital currencies (CBDCs),
which are digital representations of legal tender and direct liabilities of the
central bank itself.
In contrast to CBDCs, stablecoins are a private-market
digital alternative to fiat currency in terms of a reliable medium of exchange.
Stablecoin transactions occur without a bank intermediary, enabling
instantaneous settlement between transaction parties, regardless of geographic
location.
Stablecoins
They have the potential to bring about more competitive
economic markets by offering improved efficiency and broader financial
inclusion under a regulatory framework and provide new benefits and lower costs
to cross-border payment transactions given their ease of use for international
money transfers.
The best known stablecoin initiative is Facebook’s proposed
blockchain payment system Diem (previously known as Libra), which the company
plans to launch later this year.
Though a number of stablecoins are currently in circulation,
Facebook’s vast social media network will provide the payment system for
cross-border transactions with a significant and large global user base.
Financial institutions are attempting to find ways to
integrate stablecoins into their businesses. Adoption of stablecoins by
incumbent financial institutions or technology companies could broaden use of
stablecoins in the economy.
Do stablecoins have the potential to disintermediate banks
and financial services companies? If widespread adoption of stablecoins occurs,
the development of alternative payment networks using stablecoins could pose
disintermediation risks to payment providers and money transfer agents.
Competition from stablecoins could also create new risks for
commercial banks that issue credit cards and provide cashless payment services
to merchants.
These risks include the loss of interaction with their
customers and the potential for lower fees that banks and payment providers
receive for processing debit and credit card payments.
In assessing the role of stablecoins, bank regulators will
likely balance the need to make room for societal benefits from technological
advances and innovation, including the efficiencies such advances will bring,
on the one hand, and safeguarding the stability of the financial system on the
other.
In January 2021, under the Trump administration, one of the
three major US bank regulators took action that could allow stablecoins to gain
traction among US consumers.
The Office of the Comptroller of the Currency (OCC)
indicated that US banks can use stablecoins and independent node verification
networks (INVNs) to facilitate payments on behalf of customers.
This flexibility could lay the groundwork for stablecoins to
become an alternative payment system, alongside global payment networks such as
SWIFT and ACH.
The OCC guidance did stipulate that banks should make sure
stablecoin activities are consistent with all applicable laws, including
anti-money laundering laws.
However, the OCC under the Biden administration has
indicated it intends to review this guidance.
In announcing the review, the recently appointed Acting
Comptroller of the Currency expressed concerns that the OCC guidance was not
made in full coordination with all stakeholders and that it needs to be viewed
as part of a broader strategy to help coordinate regulatory actions governing
stablecoins: Markets Forces Africa
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