On 18 January 2022, Mr. Agustín Carstens, General Manager of the BIS, gave a speech during the Goethe University’s ILF conference on “Data, Digitalization and highlighted that there are 3 plausible scenarios for the future of money.
As regards the first scenario, concerning stablecoins, the following points are highlighted:
• Stablecoins piggyback on the credibility of sovereign currencies;
• If one big tech stablecoin takes hold, others will seek to imitate it by ending up with a few dominant players that compete both with each other and with national currencies, thus fragmenting the national and global monetary systems;
• It is undesirable to rely solely on private money. Users may initially find great convenience in paying with a big tech global stablecoin.
As regards the second scenario, regarding decentralised finance (DeFi), the following points are highlighted:
• A parallel financial system is emerging, revolving around 2 elements:
1. The first is automated, self-executing protocols, or “smart contracts”. But these contracts will never be smart enough to cover every possible eventuality, and someone must therefore write and update the code and run the platform. In practice, there is a lot of centralisations in DeFi.
2. The second element is stablecoins. They perform the actions such as maintaining a fixed value to fiat currencies, allowing transfers across platforms, forming a bridge to the traditional financial system, being the settlement instrument in DeFi, alongside governance tokens and other more volatile crypto-assets.
• Stablecoins may not be sound money, since they have to tie their value to regulated assets to borrow their credibility. Without appropriate regulation, issuers can diverge from full backing, or test the margins of what counts as a safe asset.
• Decentralisation comes at a cost. Trust in an anonymous system is maintained by self-interested validators who ensure the integrity of the ledger in the absence of a central authority. Hence, the system must generate enough fees, or rents, to provide these validators with the right incentive. These rents accumulate mostly to insiders, such as Bitcoin miners, or those who hold more governance tokens, by implying high costs for users.
• Wherever private stablecoins are issued, they need to be adequately regulated to address the risks that they pose, such as runs, payment system risk and concentration of economic power.
As regards the third scenario, an open and global monetary and financial system, the following points are highlighted:
• Central Banks could provide central bank digital currencies (CBDCs), which, unlike stablecoins, do not need to borrow their credibility. As they are directly issued by the central bank, they inherit the trust that the public already places in their currency;
• CBDCs could be provided domestically but also across borders. Distributed ledger technology (DLT) could be used to connect multiple CBDCs issued by different central banks.