The Federal Reserve Bank of New York has poured cold water on claims that stablecoins could form the basis of a future digital payments system.
In a blog post, the New York Bank’s economic analysts said that while distributed ledger technology is sure to transform global payments stablecoins present investors with a “double-edged sword.” While unbacked stablecoins are risky investments, fully backed digital currencies tie up liquidity unnecessarily.
“Some policy makers now seem to be converging toward the idea that only a digital coin that is 100 percent backed by perfectly safe and liquid assets is viable. However, such a design may be a double-edged sword,” wrote the blog’s authors Michael Lee, Joseph Torregrossa and Antoine Martin.
The report noted that stablecoins, the term used for crypto tokens which are pegged to the price of real world assets, have exploded from a $5.7bn to a $155.6bn asset class over the past 13 months.
However, the federal bank warned that a lack of regulation also creates risks for stablecoin holders. Lee, Torregrossa and Martin warned that unbacked stablecoins “resemble historical private bank notes” which encountered various problems due to the absence of a regulatory framework and safeguards to support bank deposits.
The blog authors recommended that distributed ledger technology could be harnessed by having banks issue tokenized deposits, a more “desirable” and “realistic starting point” for a future payments system given customers would retain access to liquid assets, deposits are backed up, the digital currency would be compatible with existing payments infrastructure and anti-money laundering protections are in place.
“Tokenized deposits may not be the only option that improves upon existing stablecoin offerings,” wrote the fed bank economists. “But they provide a useful example of a better type of money that can, and does in limited capacities, circulate on a DLT platform. As such, they provide a realistic starting point to pursue that objective.”