Banking system has no alternative

Overseas money changers that have been using USDT, a stablecoin, to transfer NRI remittances to India have been wrong-footed by the collapse of the premium at which it traded over the rupee-dollar exchange rate. The idea behind stablecoins is straightforward: they should serve as a digital currency, allowing for instantaneous and inexpensive money transfers. Stablecoins are meant to be a safer form of cryptocurrency, but their stability may be exaggerated. Regulations are evolving on who can issue them, and the audits of their reserves are not comprehensive. This makes the prospect of the stablecoin market growing to $3 tn in the next 5 yrs a disquieting prospect. Since the market is being driven by money transfers, issues around effective regulation will gain traction in India, the world's biggest recipient of remittances.

Doubts over the stability of stablecoins persist because their issuers are not subject to standards set out for banks. Deposits are also not secured by insurance. Although stablecoin issuers are barred from paying interest, there are workarounds. These risks are amplified by US patronage to drum up demand for dollars, which feeds its trade deficit. If stablecoins reach a market size of $3 tn by 2030, up from $300 bn now, they would rival the Fed's pandemic-era QE. This could push down US interest rates by 0.4 percentage points, and the dollar would strengthen due to the enlarged capital flow. Stablecoins are not only a threat to banks, they pose risks for central banks as well.

Naturally, the rest of the world will resist dollarisation by keeping their banking systems efficient and by issuing stablecoins pegged to their currencies. The Trump administration sees stablecoins as a way of getting around the Fed's policy independence. Other nations are unlikely to follow that route and will work towards retaining an independent interest rate mechanism. Stablecoins will be regulated to this end. They must be truly stable to provide an alternative to tightly regulated financial systems.