Currency is serious business. Too serious not to be entrusted to anyone other than central bankers. This could be the summary of the position of the European Central Bank, or at least of one of its representatives, Fabio Panetta, member of the Governing Council, on the subject of stablecoins.

The ECB has been saying all the bad things it thinks of them for many months.

For the record, a stablecoin is a “canada dry” currency. To be more precise, it is a token issued by a private company whose price is supposed to reflect the exact parity of an underlying currency constituting the “reserve” to its assets. There are several types of stablecoins, and the Bank for International Settlements with other international organizations have presented all its facets in excellent papers. There is no need here to go into detail about the functioning of this or that type of stablecoin even if the comments which follow rather deal with the stablecoins backed by a single currency.

What are the ECB's criticisms of stablecoins ? They are multiple. To quote Panetta, “They are introducing into the crypto space the type of maturity mismatch commonly seen in money market mutual funds. As we saw last year, redemption at par at any time is not guaranteed, risks of runs and contagion are ever-present, and the liquidation of reserve assets can lead to procyclical effects through collateral chains in the cryptocurrency ecosystem. » In other words, they would be risky instruments. Either. No one says the opposite: issued by companies domiciled sometimes in unsavory places, with governance rules that may leave something to be desired, it is advisable to look twice before subscribing to this or that stablecoin. But this criticism affects certain actors, and not the very principle of operation of the stablecoins.

A stablecoin is a “Canada dry” currency — a token issued by a private company whose price is supposed to reflect the exact parity of an underlying currency constituting the “reserve” to its assets.

Hubert de Vauplane

So why such ire from the ECB?

We have to go back to the late Libra project, from the former Facebook (now Meta). At that time, this project, the communication of which was carried out in a disastrous manner, had aroused the concern – quite legitimate – of many Ministers of Finance, starting with Bruno Le Maire. He, like others, and even the G7 and the G20, saw it as an attack on monetary sovereignty. It is true that Libra displayed the ambition to replace national currencies… The reaction was to provide in the draft European regulation on digital assets, known by its English acronym MiCA, drastic conditions for issuers of stablecoinscalled electronic money token.

This regulation assimilates the tokens of stablecoins to electronic money. It is a choice guided by political considerations but which is difficult to explain technically: a stablecoin differs from electronic money in that the token issued is not intended to constitute legal tender, therefore requiring their issuers to take the status of issuer of electronic money, which status is not adapted to the situation due to the technical specificities of the stablecoins — they are registered in a blockhain. Here is the subject settled: the stablecoins must be treated like any issuer of scriptural money: banking status, prudential ratios, ECB supervision.

(Also read: everything you need to know about digital currencies)

But it is first to suppose that a stablecoin constitutes currency, that is to say that the issued token can be used to pay a debt and free oneself from it, due to the fact that the stablecoinas currency, is legal tender and produces a releasing power.

This is where there is a misunderstanding of how the stablecoins and, therefore, an error in the reasoning

The objective of most stablecoins is not to replace legal tender, nor even to have its attributes. They want to be a bridge between the world “ fiat » — that of legal tender and traditional finance — and the “crypto” world. Indeed, to buy a digital asset, if it is possible to do so in euros, dollars or any other currency, it is much more efficient to carry out this payment transaction via a digital token. THE stablecoins thus constitute the monetary interface of digital assets vis-à-vis traditional finance. To fulfill this mirror function, is it appropriate to grant them the status of currency? Never.

THE stablecoins constitute the monetary interface of digital assets vis-à-vis traditional finance. To fulfill this mirror function, is it appropriate to grant them the status of currency? Never.

Hubert de Vauplane

Certainly, buyers of stablecoins must first pay euros (very rarely) or dollars (9.5 times out of 10) to hold stablecoins. From this point of view, they buy a monetary equivalent allowing them to then “do their shopping” in the crypto world. Does this monetary equivalent increase the money supply? In other words, emissions stablecoins are they likely to see the M3 aggregate evolve significantly upwards? We understand that this is one of the risks identified by the Financial Stability Forum (FSB) which sees a potential systemic risk: the increase in outstandings, that is to say in the value of stablecoins issued, may constitute a systemic risk in that it would lead to an increase in the money supply in circulation via unregulated private operators such as banks or electronic money establishments. In other words, the transmitters of stablecoins would be in the same situation as banks, but without being regulated as such: creators of scriptural money.

But this is forgetting a fundamental element. Banks create money thanks to the required reserves deposited with their central bank and by respecting a ratio of 8% of capital – this is the famous Cooke ratio. In other words, with 8 euros of equity, you can lend 100 euros to your client. This is absolutely not the case for stablecoins which have no multiplier effect (or very little): issuers of stablecoins must therefore hold in their assets reserves made up of the currency or government bond to which they are backed. In other words, for each euro or dollar stablecoin issued, the issuer must have corresponding euros or dollars in its books. In fact, the ratio is not exactly 1:1 because the assets of issuers of stablecoin is composed for a very small part of financial assets other than the reference currency or government securities of the reference currency. The M3 money supply does not increase because each stablecoin issued corresponds to a blockage of euros or dollars or government securities in the issuer's reserves.

This being explained, we understand that the stablecoins have no effect on the money supply and therefore should not pose a systemic risk to the financial sector.

THE stablecoins have no effect on the money supply. Therefore, they should not pose a systemic risk to the financial sector.

Hubert de Vauplane

Quite different is the subject of risk on banking credit intermediation of stablecoins, that is to say the risk that the massive recourse to their use by households will reduce bank deposits, and in this way have an impact on the volume of credit granted by banks. The answer depends on how the reserves of the stablecoins are composed and where they are deposited — notably with the central bank or not. This subject, examined at length by the Federal Reserve in the United States, is however very different from that examined in this paper.

If to this we add that these stablecoins are not legal tender, in other words that they are not money in the legal sense, we understand even less the reluctance of the ECB towards them. To put it another way, a stablecoin is neither “central bank money”, nor “commercial bank” money, but “private money”. And this is where the problem lies for the ECB: there cannot be “private money” circulating. More broadly, the euro cannot suffer from competition and the duty of the ECB would be to defend this monetary sovereignty which would be attacked.

This seems to us to be a very reductive vision but above all a lack of strategic vision on the part of the ECB.

Where the ECB sees in the stablecoins an attack on its monetary sovereignty, it seems that the Americans see in the stablecoins a tool allowing them to maintain their global monetary domination by the dollar.

Where the ECB sees in the stablecoins an attack on its monetary sovereignty, it seems that the Americans see in the stablecoins a tool allowing them to maintain their global monetary domination by the dollar.

Hubert de Vauplane

Faced with competition from the e-Yuan, the potential development of a common currency between the BRICS now extended to six new countries, and more generally a movement of “dedollarization” of the economy for essentially political reasons, the risk for the United States is seeing the role of the dollar as a transaction currency and global reserve currency diminish — and with that, a loss of influence and power.

How can we therefore continue to establish this monetary domination? Of course via international monetary institutions such as the IMF, the World Bank, the BIS and the FSB still largely under American influence. But this cannot last and there are more and more breaches where American influence in these instances is diminishing.

Another way, both more subtle and more effective, is to make stablecoins the vanguard of this monetary power.

The stakes are enormous: it is a question of determining which of the dollar, the yuan, or even the euro will take leadership as the currency of payment for international transactions in the digital sphere.

The ECB, in our opinion, is fighting the wrong battle: stablecoins are not his enemies.

Hubert de Vauplane

But the stablecoins in dollars fulfill this role perfectly today. This is why the American public authorities believe that it is necessary to encourage the American private sector to become “dollar substitutes”. Of course, regulations ad hoc applicable to these transmitters is necessary and even essential. No one disputes it. It is not a question of letting the transmitters of stablecoins outside of any regulation. This is the subject of several legislative proposals submitted to the American Congress since the start of the year.

There is therefore an essential strategic difference with the ECB. This, in our opinion, is fighting the wrong battle: the stablecoins are not his enemies. But his objective allies. The digital euro will not see the light of day for several years. Until then, the need for payment in “digital currency” will increase. By focusing on its position, the ECB risks consolidating the position of stablecoins in dollars. To the detriment of stablecoins in Euro.

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