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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
A few months ago, the father-in-law of one of my sons, who lives in New York state, sent what was, for him, a significant sum of money to his family in England. The money never arrived. Worse, it was impossible to discover what had happened to it. His bank contacted the intermediary it used, but was told that the destination bank in the UK, one of the country’s largest, would not respond to queries. I asked colleagues what might have happened and was advised that it might have something to do with money laundering. Meanwhile, my in-law was distraught. Then, after two months, the money suddenly reappeared in his account. He remains entirely ignorant of what happened in between.
Such an event is utterly remote from anything I have experienced when transferring money between the UK and the EU. On this side of the pond, transfers have been uniformly reliable and fast. This might be a reason for Americans to welcome the use of “stablecoins” as an alternative to their banking system. Daniel Davies has noted two others: the relatively high cost of payments made via credit cards (which are around five times those in Europe!) and the extortionate cost of cross-border remittances. Both reflect the failure to regulate powerful US oligopolies.
The FT’s Gillian Tett suggested a different motivation for the Trump administration’s welcoming stance on stablecoins in an article last month. Scott Bessent, US Treasury secretary, has a problem: the enormous volume of US Treasury debt the US needs the world to hold at modest interest rates. One solution, she notes, is to promote the widespread use of dollar-denominated stablecoins, not so much domestically, but everywhere else. This, as Tett notes, would be good for the US government.
Yet none of these are good reasons for welcoming dollar stablecoins. As Hélène Rey of the London Business School argues, “For the rest of the world, including Europe, wide adoption of US dollar stablecoins for payment purposes would be equivalent to the privatization of seigniorage by global actors.” This then would be yet another predatory move by the superpower. Alternatively, the US could shift towards a less costly payment system and less profligate government. But neither is likely.
In all, stablecoins — assets presented as digital alternatives to fiat money, especially US dollars — seem to have a bright future. Already, as Tett notes, “players such as Standard Chartered predict that the stablecoin sector will grow from $280bn to $2tn by 2028”.
The future of stablecoins might indeed be bright. But should it also be welcomed by people other than the issuers, criminals of various kinds and the US Treasury? No.
Yes, stablecoins are far more stable than, say, bitcoin. But their purported “stability” is likely to prove a “con”, relative to that of a dollar in cash or a bank.
The IMF, OECD and Bank for International Settlements have all registered serious concerns. Interestingly, the latter welcomes the idea of “tokenisation”: thus, “By bringing together tokenised central bank reserves, commercial bank money and financial assets into the same venue, a unified ledger can harness tokenisation’s full benefits.”
Yet the BIS is also concerned that stablecoins will fail to meet “the three key tests of singleness, elasticity and integrity”. What does this mean? Singleness describes the need for all forms of a given money to be exchangeable with one another at par, at all times. This is the foundation of trust in money. Elasticity means the ability to deliver payments of all sizes without gridlock. Integrity means the ability to curb financial crime and other illicit activities. A central role in all this is played by central banks and other regulators.
Stablecoins, as now operated, fall far short of these requirements: they are opaque, easily usable by criminals and of uncertain value. Last month, S&P Global Ratings downgraded Tether’s USDT, the most important dollar stablecoin, to “weak”. This is not a trustworthy money. Private monies have often failed in crises. That is very likely to be true of stablecoins, too.
Let us assume then that the US is going to promote the use of lightly regulated stablecoins, partly in order to enhance the dominant role of the US dollar and so help finance its huge fiscal deficits. What should other countries do? The answer is to defend themselves as best they can. This is particularly true for European countries. After all, with its new national security strategy, the US has made quite clear its open hostility towards democratic Europe.
So, European countries need to consider how they might introduce stablecoins in their own currencies that are more transparent, better regulated and safer than what the US is now likely to produce. The Bank of England’s approach seems a model of good sense: just last month, it introduced a “proposed regulatory regime for sterling-denominated systemic stablecoins”, arguing that the “use of regulated stablecoins could lead to faster, cheaper retail and wholesale payments, with greater functionality, both at home and across borders.” This seems to be the best starting point.
The people now in charge of the US are very much enamoured with the Big Tech motto of “move fast and break things”. In the case of money, this could be disastrous. Yes, there are reasons to exploit the possibilities of new technologies for creating faster, more reliable and safer monetary and payments system. The US certainly needs this. But a system that makes fraudulent promises of stability, facilitates irresponsible fiscal policy, and opens the door to criminality and corruption is not what the world needs. We should resist it.