Are Too Many Stablecoins a Problem? Will The Proliferation Of Stablecoins Create New Inefficiencies?

Introduction — The Rise of Stablecoins and the Singleness of Money

Stablecoins. Right now they are all the rage. Are they worth having? Yes. But might we end up with too much of a good thing?

I can see enough to agree with Simon Taylor that they are better even if they may not be cheaper, at least for now. I think about plumbing; settling trades and making payments. My take on the word of FS right now is we are effective, mostly, but not efficient. The prospect of having lots of them in any one currency feels at first blush like it could undermine effectiveness and efficiency. 

To help me develop my thinking, I spoke to Tony McLaughlin, the CEO of Ubyx, a start-up in the space delivering new plumbing for Stablecoins. Tony describes himself as a “Stablecoin Maximalist”.

With all things bleeding edge in financial services, there are a number of risks when I write: there is every risk that I haven’t understood properly, or just missed a few salient points, or just come to an implausible conclusion. If any of things are true, please call me out on them. 

In any case, please do share a comment or two.

More detail

For those who’d like to hear and see the interview, it is available here.

Tokenised Deposits vs. Stablecoins — What’s the Difference?

Why Banks Are Exploring Tokenised Deposits

Before going down the rabbit hole of stablecoins and Tony’s vision for Ubyx as a valuable piece of financial market infrastructure (FMI), let’s start with tokenised deposits. Clearly, JP Morgan sees something here, even going as far as to create JPMD on a public blockchain, albeit as a private members’ club. Citi, where Tony worked until recently, has made noises about its intentions with these things. 

My take on tokenised deposits until now has been: “Not useful outside the four walls of the place that issued them”. The main ingredient in my thinking was that this was just about new payment rails inside JPM or any other bank. My current thinking is: “Useful inside the four walls of the issuer or the private members’ only gardens controlled by the issuer. And, Stablecoins are better because of interoperability, programmability and availability.” 

The Role of Public Blockchains in Payment Systems

Tony offered the view that “tokenised deposits are good”. Once they are “tokens on a public blockchain” then we can reap the benefits of what Tony describes as “general purpose technology”. This is in contrast to today’s world of financial services (FS) where we have numerous flavours of special purpose technology, aka vertical silos in the form of private members’ clubs. 

Advantages and Limitations of Tokenised Deposits

Tony added that tokenised bank deposits will have an important role to play, at the very least until non-bank stablecoins reach cash equivalence. The ingredient we need to enable that is a clearing service, which is what Tony and his team at Unyx are aiming to build. Tony also emphasised that history helps us in this space; we have built these rails in the past. 

There is though one difference in features or capabilities between today’s fiat accounts and tokens on chain; overdrafts. On today’s fiat rails, going overdrawn or negative is possible and does happen. In wholesale banking, intraday overdrafts are a sine qua non for ensuring trades settle and payments are made. On chain, that can’t be done. Well not directly; those in need would need to formally borrow.

Would having too many stablecoins be a bad thing?

The Risk of Fragmented Liquidity in Digital Payments

I would offer that stablecoins coupled with the rails of our new world of tokenised assets gets us to a world where the means of payment is better than both of what tokenised deposits might do and the fiat rails we have today.  

Being the Bankers’ Plumber I’d say: “Great, then nirvana is when we have one and only one stable in each currency”. In US dollars, we already have two heavyweights in USDT and USDC, with more on the way and new EUR coins coming. Is more than one a useful thing?

In my mind, a stablecoin is like a money market fund; backed by a portfolio of assets, so no two coins would have exactly the same holdings, so we’d expect some variation in price. 

Why Clearing and Interoperability Are Critical

Tony’s input helped me polish my views. The unlock lies in the clearing services we can introduce. Importantly, we should expect to need both clearing and trading. Clearing means the holder presents the tokens to the issuer for redemption at par. Trading means you go to a marketplace, find a potential buyer and then agree a price, which may differ from par. 

• Clearing (par redemption): present tokens to the issuer and redeem at face value.
  
  
• Trading (market price): sell to a buyer in a venue; price may differ from par.

The Need for Clearing Infrastructure in the Stablecoin Era

Today, it is possible to write a cheque drawn on a money market account. Well at least in the USA where these things are still used, as compared to an advanced country like Switzerland where I have not used a check in the last 35 years. Though they are effective, it is no stretch to say they are inefficient.

Tony offered the view that the equivalent of the “cheque drawn on a money market account”, i.e. the “train”, will exist on the new “rails” of pubic blockchains. I am with him on this, and my sense is that the new general-purpose technology of tokenised assets gives the public new optionality; “pay with a slice of a tokenised asset from my wallet”.

I see wallet infrastructure being custodial and sponsored by regulated financial institutions. The provider moves to the background in the same way the provider of my mobile phone service is “in the background”; those who want to call me or WhatsApp me only need to know my number. 

Stablecoins for wholesale markets?

Central Bank Money as the Settlement Gold Standard

Over the years of my involvement in things digital assets, I have offered the view that developments on the assets side have been a slow train coming and that, without a great solution for the means of payment, we are missing a key enabler for the markets. That was what I saw, and still see, as the promise of what Fnality is trying to do with a new payment system. I asked Tony what he thought about the role for stablecoins in wholesale markets. 

The Fnality Example — Wholesale Payments Without Public Blockchains

He started by reminding me that we have gold standard for things wholesale. These are laid out in the PFMI, the Principles for Financial Market Infrastructure, which includes a guidance that using central bank money to settle trades and make payments is the preferred solution. That gets us to: “Tokens can be useful for wholesale but will ideally need to be underpinned by central bank money”. This is exactly the need which Fnality is aiming to serve, albeit not using tokens on a public blockchain. 

Current Gaps — Why Public Blockchains Still Can’t Handle Everything

Missing Payment Reference Data

Tony pointed out that there is one part of the payments cycle which public blockchains in their current format cannot solve for: payor / payee information. When things move on a public blockchain, the system tells the recipient: “You have received X from Y”. There is no place to add “because of Z with a reference or by order of Mrs. P Smith of Kennington”.

I contrast that with the legacy world here in Switzerland where we pay bills, sent by email or scanned to me by the Post Office, by scanning the QR code, which allows the payment rails to pass on all the payee / payor information, up to and including a reference. We need a new solution for this.

Now, as Tony has pointed out: we solved for this in the past, and we will undoubtedly solve for it with the new rails.

In Conclusion

The promise of what new tech in the form of new digital assets could do for financial services in terms of both efficiency and effectiveness is really worth striving for. The potential is in maximising the advantages of general purpose technology.

To realise that potential we need to borrow from history; we will need clearing mechanisms to enable stablecoins and tokenised deposits to be widely used as a means of payment.

Thanks for reading. Please do let me know what you think of these notes. Feedback via the comments would be great.

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Author

Olaf Ransome is a liquidity and financial services expert. He is the founder of 3C Advisory  You can message Olaf directly here.