Stablecoin implosion shows it has 'no role' as a form of money, says Bank of International Settlements' Asia chief
South China Morning Post
4 min read
The recent collapse in the value of stablecoins shows they are ill-suited as a form of money and that their attempt to piggyback on money issued by central banks does not give them the stability their name suggests, according to the Asia-Pacific head of the Bank of International Settlements (BIS).
The implosion of several stablecoins, including TerraUSD which saw its value reduced to almost nothing in May from being the third-largest with a US$18.7 billion market capitalisation at its peak, has revealed the pitfalls of cryptocurrencies, said Siddharth Tiwari, chief representative of the BIS Asian office.
"Recent events show that stablecoin fails to achieve the full network effect we would normally expect of money," said Tiwari. "But the innovation that they bring is important for us, and could be useful for the design of central bank digital currencies."
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Stablecoins differ from cryptocurrencies such as bitcoin and ethereum in that their value is pegged to another asset, often a fiat currency or a commodity, theoretically making them immune to wild price swings.
However, in the case of so-called algorithmic stablecoins such as TerraUSD, the link to the value of the underlying asset can be somewhat tenuous and, as the recent collapse demonstrated, fragile.
TerraUSD (UST) theoretically tracks the US dollar via an algorithmic link to its sister coin, Luna, which also crashed, though it is unsecured by any real-world assets. It had been designed to keep a peg with the American currency by being convertible into one dollar's worth of Luna, and vice versa.
But stablecoins that are backed by real assets, such as tether and USD Coin, whose values are pegged one-to-one with US dollar reserves, did not emerge unscathed either. Following the collapse of TerraUSD, tether at one point breached its peg as the broader cryptocurrency market went through a fear-driven sell-off.
Tiwari, who spoke with the Post in an interview from the BIS headquarters in Basel, Switzerland, gave his views on the state of the cryptocurrency market outlined by the bank's annual economic report released last week.
The report predicted that central-bank digital currencies will form a key plank of the future monetary system.
Various research initiatives are under way at central banks as they race to develop their own sovereign digital currencies.
The People's Bank of China (PBOC) already has a commanding lead in the Asia-Pacific region in terms of implementation. It has joined the central banks of the United Arab Emirates, Thailand and the Monetary Authority of Hong Kong (HKMA) in developing a multinational platform called "mBridge".
The BIS Innovation Hub is working on similar prototypes built by the central banks of Singapore, Malaysia, Australia and South Africa.
"Ideally we would want one common platform where central-bank digital currencies can interoperate and transact, but we are not at that stage yet," said Tiwari.
Central banks are better placed to provide the core of the future monetary system, given their fundamental role in ensuring finality of payments by using their balance sheets as a trusted intermediary, the report said.
Tiwari, who is leaving the multilateral financial institution in August after more than three years in the top job, also commented on the challenges faced by his successor, Zhang Tao, who has already started transitioning into his new role. The former People's Bank of China deputy governor is the first Chinese person to occupy the most senior position in the region.
"Zhang brings immense policy experience to the BIS. The challenges facing BIS, and Zhang, include how do we help emerging market countries in Asia to [tackle] the current high inflation given the current stage of the financial cycle we are in, with high debt and increased vulnerabilities," he said.
While he has not decided on his next career move, he said his deep interest in building financial architecture will remain his focus, and he will continue his research into developing digital public infrastructure and governance for the use of data.
The HKMA, Hong Kong's de facto central bank, for example, is launching a commercial data interchange, a platform that will allow banks to access different business data provided by sources such as trade links, point-of-sale terminals and electricity companies to enable them to make better credit decisions for corporate borrowers. Companies, in turn, will also have better control of the use of their data footprint.
"We have built frameworks on trade, capital flows and investments, but these are all being increasingly replaced by data," he said. "Each country needs to have a governance system on data."
