In its latest report, the Bank for International Settlements (BIS) questioned the “currency” position of the stable currency. According to the Agency, the stabilization currency is now closer to investment instruments such as ETF, rather than a real currency that can circulate and settle at face value in any scenario.
BIS questions monetary attributes
The report states that the true currency should be accepted unconditionally at the time of payment and that the value would not be depreciated depending on the issuer or the channel of circulation. In the opinion of BIS, this feature is not yet present in the stable currency.
The reasons for this are two: first, that when a stable currency is traded in a secondary market, the price is not always strictly equal to US$ 1; and second, that when a user redeems a stable currency as a French currency, the process is not always completed immediately and without friction. This performance is closer to the status of the ETF share around a small net value premium or discount.
The report also notes that currency stabilization transfers are not directly settled on the central bank balance sheet, nor are they indirectly dependent on the final liquidation of the central bank currency. As a result, stable currencies in different issuers and in different block chains are not guaranteed to be exchanged at all times.
Value relies on reserve trust
According to BIS, the value base of the stable currency derives mainly from the market ' s confidence in the issuer ' s reserve assets and foreclosure arrangements, rather than from the natural embedding of the final liquidity of the existing monetary system, as in the case of bank deposits.
It is also mentioned that the stable currency usually follows the “first deposit, later foundry” model. The user delivers the equivalent cash and the issuer generates the corresponding token. This means that the expansion of stable currency supply depends on pre-financing and lacks the flexibility of the banking system to create savings through lending.
United States dollar risk is named.
In addition to monetary attributes, the BIS focuses on the spillover effects of dollar stabilization on some economies. The report states that an increasing inflow of non-United States dollar currencies to the United States dollar is likely to weaken demand for domestic currency and accelerate the dollarization process in vulnerable economies.
According to BIS, this phenomenon is similar to the “dollarization of deposits” that occurred in the past period of macroeconomic instability. When high inflation or sovereign pressure rises, residents and money tend to shift to foreign currency assets. The stabilization currency moved the process to the chain and moved faster.
The report also notes that arbitrage between stable currencies and traditional foreign exchange markets is not always smooth. Such friction may push up the cost of obtaining the United States dollar through foreign exchange swaps and put pressure on the immediate market for the currency.
Cross-border restrictions are more difficult to enforce
According to BIS, some emerging markets and developing economies have imposed restrictions on the use of cross-border stabilization currencies, but such measures may not be easily effective. The reason for this is that the stable currency has the characteristics of a digitized instrument of possession and that users can own and transfer assets through non-trust wallets.
This means that traditional capital controls on bank deposits and cross-border financial flows do not necessarily apply directly to non-border, self-depositable token systems. The BIS concluded that, instead of weakening the impact of the dollar, the currency could strengthen its position in terms of payments and reserves in some parts of the country.