Stablecoins in search of a nominal anchor
A key development in the crypto universe is the rise of decentralised finance, or "DeFi".
DeFi offers financial service and products, but with the declared objective of refashioning the
financial system by cutting out the middlemen and thereby lowering costs.6 To this end, DeFi
applications publicly record pseudo-anonymous transactions in cryptocurrencies on
permissionless blockchains. "Decentralised applications" (dApps) featuring smart contracts allow
transactions to be automated. To reach consensus, validators are incentivised through rewards.
While the DeFi ecosystem is evolving rapidly, the main types of financial activity
continue to be those already available in traditional finance, such as lending, trading and
insurance.7 Lending platforms let users lend out their stablecoins with interest to borrowers that
post other cryptocurrencies as collateral. Decentralised exchanges (DEXs) represent
marketplaces where transactions occur directly between cryptocurrency or stablecoin traders,
with prices determined via algorithms. On DeFi insurance platforms, users can insure themselves
against eg the mishandling of private keys, exchange hacks or smart contract failures. As
activities almost exclusively involve exchanging one stablecoin or cryptocurrency for another,
and do not finance productive investments in the real economy, the system is mostly self-
referential.
Stablecoins play a key role in the DeFi ecosystem. These are so-called because they are
usually pegged to a numeraire, such as the US dollar, but can also target the price of other
currencies or assets (eg gold). In this sense, they often import the credibility provided by the unit
of account issued by the central bank. Their main use case is to overcome the high price
volatility and low liquidity of unbacked cryptocurrencies, like Bitcoin. Their use also avoids
frequent conversion between cryptocurrencies and bank deposits in sovereign currency, which is
usually associated with significant fees. Because stablecoins are used to support a wide range of
DeFi activities, turnover in stablecoins generally dwarfs that of other cryptocurrencies.
The two main types of stablecoin are asset-backed and algorithmic. Asset-backed
stablecoins, such as Tether, USD Coin and Binance USD, are typically managed by a centralised
intermediary who invests the underlying collateral and coordinates the coins' redemption and
creation. Assets can be held in government bonds, short-term corporate debt or bank deposits, or
in other cryptocurrencies. In contrast, algorithmic stablecoins, such as TerraUSD before its
implosion, rely on complex algorithms that automatically rebalance supply to maintain their
value relative to the target currency or asset. To avoid reliance on fiat currency, they often do so
by providing users with an arbitrage opportunity relative to another cryptocurrency.
Despite their name, stablecoins – in particular, algorithmic ones – are less stable than their
issuers claim. In May 2022, TerraUSD entered a death spiral, as its value dropped from $1 to just
a few cents over the course of a few days. In the aftermath, other algorithmic stablecoins came
under pressure. But so did some asset-backed stablecoins, which have seen large-scale
redemptions, temporarily losing their peg in the wake of the shock. Redemptions were more
pronounced among stablecoins whose issuers did not disclose the composition of reserve assets
in detail, presumably reflecting investors' worries that such issuers might not be able to guarantee
conversion at par.
Indeed, commentators have warned for some time that there is an inherent conflict of
interest in stablecoins, with an incentive for issuers to invest in riskier assets. Economic history
is littered with attempts at private money that failed, leading to losses for investors and the real
economy. The robustness of stablecoin stabilisation mechanisms depends crucially on the quality
and transparency of their reserve assets, which are often woefully lacking.8
Yet even if stablecoins were to remain stable to some extent, they lack the qualities
necessary to underpin the future monetary system. They must import their credibility from
sovereign fiat currencies, but they benefit neither from the regulatory requirements and
protections of bank deposits and e-money, nor from the central bank as a lender of last resort. In
addition, they tie up liquidity and can fragment the monetary system, thus undermining the
singleness of the currency.9 As stablecoins are barely used to pay for real-world goods and
services, but underpin the largely self-referential DeFi ecosystem, some have questioned whether
stablecoins should be banned.10 As will be discussed below, there is more promise in sounder
representations of central bank money and liabilities of regulated issuers.
A key development in the crypto universe is the rise of decentralised finance, or "DeFi".
DeFi offers financial service and products, but with the declared objective of refashioning the
financial system by cutting out the middlemen and thereby lowering costs.6 To this end, DeFi
applications publicly record pseudo-anonymous transactions in cryptocurrencies on
permissionless blockchains. "Decentralised applications" (dApps) featuring smart contracts allow
transactions to be automated. To reach consensus, validators are incentivised through rewards.
While the DeFi ecosystem is evolving rapidly, the main types of financial activity
continue to be those already available in traditional finance, such as lending, trading and
insurance.7 Lending platforms let users lend out their stablecoins with interest to borrowers that
post other cryptocurrencies as collateral. Decentralised exchanges (DEXs) represent
marketplaces where transactions occur directly between cryptocurrency or stablecoin traders,
with prices determined via algorithms. On DeFi insurance platforms, users can insure themselves
against eg the mishandling of private keys, exchange hacks or smart contract failures. As
activities almost exclusively involve exchanging one stablecoin or cryptocurrency for another,
and do not finance productive investments in the real economy, the system is mostly self-
referential.
Stablecoins play a key role in the DeFi ecosystem. These are so-called because they are
usually pegged to a numeraire, such as the US dollar, but can also target the price of other
currencies or assets (eg gold). In this sense, they often import the credibility provided by the unit
of account issued by the central bank. Their main use case is to overcome the high price
volatility and low liquidity of unbacked cryptocurrencies, like Bitcoin. Their use also avoids
frequent conversion between cryptocurrencies and bank deposits in sovereign currency, which is
usually associated with significant fees. Because stablecoins are used to support a wide range of
DeFi activities, turnover in stablecoins generally dwarfs that of other cryptocurrencies.
The two main types of stablecoin are asset-backed and algorithmic. Asset-backed
stablecoins, such as Tether, USD Coin and Binance USD, are typically managed by a centralised
intermediary who invests the underlying collateral and coordinates the coins' redemption and
creation. Assets can be held in government bonds, short-term corporate debt or bank deposits, or
in other cryptocurrencies. In contrast, algorithmic stablecoins, such as TerraUSD before its
implosion, rely on complex algorithms that automatically rebalance supply to maintain their
value relative to the target currency or asset. To avoid reliance on fiat currency, they often do so
by providing users with an arbitrage opportunity relative to another cryptocurrency.
Despite their name, stablecoins – in particular, algorithmic ones – are less stable than their
issuers claim. In May 2022, TerraUSD entered a death spiral, as its value dropped from $1 to just
a few cents over the course of a few days. In the aftermath, other algorithmic stablecoins came
under pressure. But so did some asset-backed stablecoins, which have seen large-scale
redemptions, temporarily losing their peg in the wake of the shock. Redemptions were more
pronounced among stablecoins whose issuers did not disclose the composition of reserve assets
in detail, presumably reflecting investors' worries that such issuers might not be able to guarantee
conversion at par.
Indeed, commentators have warned for some time that there is an inherent conflict of
interest in stablecoins, with an incentive for issuers to invest in riskier assets. Economic history
is littered with attempts at private money that failed, leading to losses for investors and the real
economy. The robustness of stablecoin stabilisation mechanisms depends crucially on the quality
and transparency of their reserve assets, which are often woefully lacking.8
Yet even if stablecoins were to remain stable to some extent, they lack the qualities
necessary to underpin the future monetary system. They must import their credibility from
sovereign fiat currencies, but they benefit neither from the regulatory requirements and
protections of bank deposits and e-money, nor from the central bank as a lender of last resort. In
addition, they tie up liquidity and can fragment the monetary system, thus undermining the
singleness of the currency.9 As stablecoins are barely used to pay for real-world goods and
services, but underpin the largely self-referential DeFi ecosystem, some have questioned whether
stablecoins should be banned.10 As will be discussed below, there is more promise in sounder
representations of central bank money and liabilities of regulated issuers.
A key development in the crypto universe is the rise of decentralised finance, or "DeFi".
DeFi offers financial service and products, but with the declared objective of refashioning the
financial system by cutting out the middlemen and thereby lowering costs.6 To this end, DeFi
applications publicly record pseudo-anonymous transactions in cryptocurrencies on
permissionless blockchains. "Decentralised applications" (dApps) featuring smart contracts allow
transactions to be automated. To reach consensus, validators are incentivised through rewards.
While the DeFi ecosystem is evolving rapidly, the main types of financial activity
continue to be those already available in traditional finance, such as lending, trading and
insurance.7 Lending platforms let users lend out their stablecoins with interest to borrowers that
post other cryptocurrencies as collateral. Decentralised exchanges (DEXs) represent
marketplaces where transactions occur directly between cryptocurrency or stablecoin traders,
with prices determined via algorithms. On DeFi insurance platforms, users can insure themselves
against eg the mishandling of private keys, exchange hacks or smart contract failures. As
activities almost exclusively involve exchanging one stablecoin or cryptocurrency for another,
and do not finance productive investments in the real economy, the system is mostly self-
referential.
Stablecoins play a key role in the DeFi ecosystem. These are so-called because they are
usually pegged to a numeraire, such as the US dollar, but can also target the price of other
currencies or assets (eg gold). In this sense, they often import the credibility provided by the unit
of account issued by the central bank. Their main use case is to overcome the high price
volatility and low liquidity of unbacked cryptocurrencies, like Bitcoin. Their use also avoids
frequent conversion between cryptocurrencies and bank deposits in sovereign currency, which is
usually associated with significant fees. Because stablecoins are used to support a wide range of
DeFi activities, turnover in stablecoins generally dwarfs that of other cryptocurrencies.
The two main types of stablecoin are asset-backed and algorithmic. Asset-backed
stablecoins, such as Tether, USD Coin and Binance USD, are typically managed by a centralised
intermediary who invests the underlying collateral and coordinates the coins' redemption and
creation. Assets can be held in government bonds, short-term corporate debt or bank deposits, or
in other cryptocurrencies. In contrast, algorithmic stablecoins, such as TerraUSD before its
implosion, rely on complex algorithms that automatically rebalance supply to maintain their
value relative to the target currency or asset. To avoid reliance on fiat currency, they often do so
by providing users with an arbitrage opportunity relative to another cryptocurrency.
Despite their name, stablecoins – in particular, algorithmic ones – are less stable than their
issuers claim. In May 2022, TerraUSD entered a death spiral, as its value dropped from $1 to just
a few cents over the course of a few days. In the aftermath, other algorithmic stablecoins came
under pressure. But so did some asset-backed stablecoins, which have seen large-scale
redemptions, temporarily losing their peg in the wake of the shock. Redemptions were more
pronounced among stablecoins whose issuers did not disclose the composition of reserve assets
in detail, presumably reflecting investors' worries that such issuers might not be able to guarantee
conversion at par.
Indeed, commentators have warned for some time that there is an inherent conflict of
interest in stablecoins, with an incentive for issuers to invest in riskier assets. Economic history
is littered with attempts at private money that failed, leading to losses for investors and the real
economy. The robustness of stablecoin stabilisation mechanisms depends crucially on the quality
and transparency of their reserve assets, which are often woefully lacking.8
Yet even if stablecoins were to remain stable to some extent, they lack the qualities
necessary to underpin the future monetary system. They must import their credibility from
sovereign fiat currencies, but they benefit neither from the regulatory requirements and
protections of bank deposits and e-money, nor from the central bank as a lender of last resort. In
addition, they tie up liquidity and can fragment the monetary system, thus undermining the
singleness of the currency.9 As stablecoins are barely used to pay for real-world goods and
services, but underpin the largely self-referential DeFi ecosystem, some have questioned whether
stablecoins should be banned.10 As will be discussed below, there is more promise in sounder
representations of central bank money and liabilities of regulated issuers.
A key development in the crypto universe is the rise of decentralised finance, or "DeFi".
DeFi offers financial service and products, but with the declared objective of refashioning the
financial system by cutting out the middlemen and thereby lowering costs.6 To this end, DeFi
applications publicly record pseudo-anonymous transactions in cryptocurrencies on
permissionless blockchains. "Decentralised applications" (dApps) featuring smart contracts allow
transactions to be automated. To reach consensus, validators are incentivised through rewards.
While the DeFi ecosystem is evolving rapidly, the main types of financial activity
continue to be those already available in traditional finance, such as lending, trading and
insurance.7 Lending platforms let users lend out their stablecoins with interest to borrowers that
post other cryptocurrencies as collateral. Decentralised exchanges (DEXs) represent
marketplaces where transactions occur directly between cryptocurrency or stablecoin traders,
with prices determined via algorithms. On DeFi insurance platforms, users can insure themselves
against eg the mishandling of private keys, exchange hacks or smart contract failures. As
activities almost exclusively involve exchanging one stablecoin or cryptocurrency for another,
and do not finance productive investments in the real economy, the system is mostly self-
referential.
Stablecoins play a key role in the DeFi ecosystem. These are so-called because they are
usually pegged to a numeraire, such as the US dollar, but can also target the price of other
currencies or assets (eg gold). In this sense, they often import the credibility provided by the unit
of account issued by the central bank. Their main use case is to overcome the high price
volatility and low liquidity of unbacked cryptocurrencies, like Bitcoin. Their use also avoids
frequent conversion between cryptocurrencies and bank deposits in sovereign currency, which is
usually associated with significant fees. Because stablecoins are used to support a wide range of
DeFi activities, turnover in stablecoins generally dwarfs that of other cryptocurrencies.
The two main types of stablecoin are asset-backed and algorithmic. Asset-backed
stablecoins, such as Tether, USD Coin and Binance USD, are typically managed by a centralised
intermediary who invests the underlying collateral and coordinates the coins' redemption and
creation. Assets can be held in government bonds, short-term corporate debt or bank deposits, or
in other cryptocurrencies. In contrast, algorithmic stablecoins, such as TerraUSD before its
implosion, rely on complex algorithms that automatically rebalance supply to maintain their
value relative to the target currency or asset. To avoid reliance on fiat currency, they often do so
by providing users with an arbitrage opportunity relative to another cryptocurrency.
Despite their name, stablecoins – in particular, algorithmic ones – are less stable than their
issuers claim. In May 2022, TerraUSD entered a death spiral, as its value dropped from $1 to just
a few cents over the course of a few days. In the aftermath, other algorithmic stablecoins came
under pressure. But so did some asset-backed stablecoins, which have seen large-scale
redemptions, temporarily losing their peg in the wake of the shock. Redemptions were more
pronounced among stablecoins whose issuers did not disclose the composition of reserve assets
in detail, presumably reflecting investors' worries that such issuers might not be able to guarantee
conversion at par.
Indeed, commentators have warned for some time that there is an inherent conflict of
interest in stablecoins, with an incentive for issuers to invest in riskier assets. Economic history
is littered with attempts at private money that failed, leading to losses for investors and the real
economy. The robustness of stablecoin stabilisation mechanisms depends crucially on the quality
and transparency of their reserve assets, which are often woefully lacking.8
Yet even if stablecoins were to remain stable to some extent, they lack the qualities
necessary to underpin the future monetary system. They must import their credibility from
sovereign fiat currencies, but they benefit neither from the regulatory requirements and
protections of bank deposits and e-money, nor from the central bank as a lender of last resort. In
addition, they tie up liquidity and can fragment the monetary system, thus undermining the
singleness of the currency.9 As stablecoins are barely used to pay for real-world goods and
services, but underpin the largely self-referential DeFi ecosystem, some have questioned whether
stablecoins should be banned.10 As will be discussed below, there is more promise in sounder
representations of central bank money and liabilities of regulated issuers.
A key development in the crypto universe is the rise of decentralised finance, or "DeFi".
DeFi offers financial service and products, but with the declared objective of refashioning the
financial system by cutting out the middlemen and thereby lowering costs.6 To this end, DeFi
applications publicly record pseudo-anonymous transactions in cryptocurrencies on
permissionless blockchains. "Decentralised applications" (dApps) featuring smart contracts allow
transactions to be automated. To reach consensus, validators are incentivised through rewards.
While the DeFi ecosystem is evolving rapidly, the main types of financial activity
continue to be those already available in traditional finance, such as lending, trading and
insurance.7 Lending platforms let users lend out their stablecoins with interest to borrowers that
post other cryptocurrencies as collateral. Decentralised exchanges (DEXs) represent
marketplaces where transactions occur directly between cryptocurrency or stablecoin traders,
with prices determined via algorithms. On DeFi insurance platforms, users can insure themselves
against eg the mishandling of private keys, exchange hacks or smart contract failures. As
activities almost exclusively involve exchanging one stablecoin or cryptocurrency for another,
and do not finance productive investments in the real economy, the system is mostly self-
referential.
Stablecoins play a key role in the DeFi ecosystem. These are so-called because they are
usually pegged to a numeraire, such as the US dollar, but can also target the price of other
currencies or assets (eg gold). In this sense, they often import the credibility provided by the unit
of account issued by the central bank. Their main use case is to overcome the high price
volatility and low liquidity of unbacked cryptocurrencies, like Bitcoin. Their use also avoids
frequent conversion between cryptocurrencies and bank deposits in sovereign currency, which is
usually associated with significant fees. Because stablecoins are used to support a wide range of
DeFi activities, turnover in stablecoins generally dwarfs that of other cryptocurrencies.
The two main types of stablecoin are asset-backed and algorithmic. Asset-backed
stablecoins, such as Tether, USD Coin and Binance USD, are typically managed by a centralised
intermediary who invests the underlying collateral and coordinates the coins' redemption and
creation. Assets can be held in government bonds, short-term corporate debt or bank deposits, or
in other cryptocurrencies. In contrast, algorithmic stablecoins, such as TerraUSD before its
implosion, rely on complex algorithms that automatically rebalance supply to maintain their
value relative to the target currency or asset. To avoid reliance on fiat currency, they often do so
by providing users with an arbitrage opportunity relative to another cryptocurrency.
Despite their name, stablecoins – in particular, algorithmic ones – are less stable than their
issuers claim. In May 2022, TerraUSD entered a death spiral, as its value dropped from $1 to just
a few cents over the course of a few days. In the aftermath, other algorithmic stablecoins came
under pressure. But so did some asset-backed stablecoins, which have seen large-scale
redemptions, temporarily losing their peg in the wake of the shock. Redemptions were more
pronounced among stablecoins whose issuers did not disclose the composition of reserve assets
in detail, presumably reflecting investors' worries that such issuers might not be able to guarantee
conversion at par.
Indeed, commentators have warned for some time that there is an inherent conflict of
interest in stablecoins, with an incentive for issuers to invest in riskier assets. Economic history
is littered with attempts at private money that failed, leading to losses for investors and the real
economy. The robustness of stablecoin stabilisation mechanisms depends crucially on the quality
and transparency of their reserve assets, which are often woefully lacking.8
Yet even if stablecoins were to remain stable to some extent, they lack the qualities
necessary to underpin the future monetary system. They must import their credibility from
sovereign fiat currencies, but they benefit neither from the regulatory requirements and
protections of bank deposits and e-money, nor from the central bank as a lender of last resort. In
addition, they tie up liquidity and can fragment the monetary system, thus undermining the
singleness of the currency.9 As stablecoins are barely used to pay for real-world goods and
services, but underpin the largely self-referential DeFi ecosystem, some have questioned whether
stablecoins should be banned.10 As will be discussed below, there is more promise in sounder
representations of central bank money and liabilities of regulated issuers.
A key development in the crypto universe is the rise of decentralised finance, or "DeFi".
DeFi offers financial service and products, but with the declared objective of refashioning the
financial system by cutting out the middlemen and thereby lowering costs.6 To this end, DeFi
applications publicly record pseudo-anonymous transactions in cryptocurrencies on
permissionless blockchains. "Decentralised applications" (dApps) featuring smart contracts allow
transactions to be automated. To reach consensus, validators are incentivised through rewards.
While the DeFi ecosystem is evolving rapidly, the main types of financial activity
continue to be those already available in traditional finance, such as lending, trading and
insurance.7 Lending platforms let users lend out their stablecoins with interest to borrowers that
post other cryptocurrencies as collateral. Decentralised exchanges (DEXs) represent
marketplaces where transactions occur directly between cryptocurrency or stablecoin traders,
with prices determined via algorithms. On DeFi insurance platforms, users can insure themselves
against eg the mishandling of private keys, exchange hacks or smart contract failures. As
activities almost exclusively involve exchanging one stablecoin or cryptocurrency for another,
and do not finance productive investments in the real economy, the system is mostly self-
referential.
Stablecoins play a key role in the DeFi ecosystem. These are so-called because they are
usually pegged to a numeraire, such as the US dollar, but can also target the price of other
currencies or assets (eg gold). In this sense, they often import the credibility provided by the unit
of account issued by the central bank. Their main use case is to overcome the high price
volatility and low liquidity of unbacked cryptocurrencies, like Bitcoin. Their use also avoids
frequent conversion between cryptocurrencies and bank deposits in sovereign currency, which is
usually associated with significant fees. Because stablecoins are used to support a wide range of
DeFi activities, turnover in stablecoins generally dwarfs that of other cryptocurrencies.
The two main types of stablecoin are asset-backed and algorithmic. Asset-backed
stablecoins, such as Tether, USD Coin and Binance USD, are typically managed by a centralised
intermediary who invests the underlying collateral and coordinates the coins' redemption and
creation. Assets can be held in government bonds, short-term corporate debt or bank deposits, or
in other cryptocurrencies. In contrast, algorithmic stablecoins, such as TerraUSD before its
implosion, rely on complex algorithms that automatically rebalance supply to maintain their
value relative to the target currency or asset. To avoid reliance on fiat currency, they often do so
by providing users with an arbitrage opportunity relative to another cryptocurrency.
Despite their name, stablecoins – in particular, algorithmic ones – are less stable than their
issuers claim. In May 2022, TerraUSD entered a death spiral, as its value dropped from $1 to just
a few cents over the course of a few days. In the aftermath, other algorithmic stablecoins came
under pressure. But so did some asset-backed stablecoins, which have seen large-scale
redemptions, temporarily losing their peg in the wake of the shock. Redemptions were more
pronounced among stablecoins whose issuers did not disclose the composition of reserve assets
in detail, presumably reflecting investors' worries that such issuers might not be able to guarantee
conversion at par.
Indeed, commentators have warned for some time that there is an inherent conflict of
interest in stablecoins, with an incentive for issuers to invest in riskier assets. Economic history
is littered with attempts at private money that failed, leading to losses for investors and the real
economy. The robustness of stablecoin stabilisation mechanisms depends crucially on the quality
and transparency of their reserve assets, which are often woefully lacking.8
Yet even if stablecoins were to remain stable to some extent, they lack the qualities
necessary to underpin the future monetary system. They must import their credibility from
sovereign fiat currencies, but they benefit neither from the regulatory requirements and
protections of bank deposits and e-money, nor from the central bank as a lender of last resort. In
addition, they tie up liquidity and can fragment the monetary system, thus undermining the
singleness of the currency.9 As stablecoins are barely used to pay for real-world goods and
services, but underpin the largely self-referential DeFi ecosystem, some have questioned whether
stablecoins should be banned.10 As will be discussed below, there is more promise in sounder
representations of central bank money and liabilities of regulated issuers.
A key development in the crypto universe is the rise of decentralised finance, or "DeFi".
DeFi offers financial service and products, but with the declared objective of refashioning the
financial system by cutting out the middlemen and thereby lowering costs.6 To this end, DeFi
applications publicly record pseudo-anonymous transactions in cryptocurrencies on
permissionless blockchains. "Decentralised applications" (dApps) featuring smart contracts allow
transactions to be automated. To reach consensus, validators are incentivised through rewards.
While the DeFi ecosystem is evolving rapidly, the main types of financial activity
continue to be those already available in traditional finance, such as lending, trading and
insurance.7 Lending platforms let users lend out their stablecoins with interest to borrowers that
post other cryptocurrencies as collateral. Decentralised exchanges (DEXs) represent
marketplaces where transactions occur directly between cryptocurrency or stablecoin traders,
with prices determined via algorithms. On DeFi insurance platforms, users can insure themselves
against eg the mishandling of private keys, exchange hacks or smart contract failures. As
activities almost exclusively involve exchanging one stablecoin or cryptocurrency for another,
and do not finance productive investments in the real economy, the system is mostly self-
referential.
Stablecoins play a key role in the DeFi ecosystem. These are so-called because they are
usually pegged to a numeraire, such as the US dollar, but can also target the price of other
currencies or assets (eg gold). In this sense, they often import the credibility provided by the unit
of account issued by the central bank. Their main use case is to overcome the high price
volatility and low liquidity of unbacked cryptocurrencies, like Bitcoin. Their use also avoids
frequent conversion between cryptocurrencies and bank deposits in sovereign currency, which is
usually associated with significant fees. Because stablecoins are used to support a wide range of
DeFi activities, turnover in stablecoins generally dwarfs that of other cryptocurrencies.
The two main types of stablecoin are asset-backed and algorithmic. Asset-backed
stablecoins, such as Tether, USD Coin and Binance USD, are typically managed by a centralised
intermediary who invests the underlying collateral and coordinates the coins' redemption and
creation. Assets can be held in government bonds, short-term corporate debt or bank deposits, or
in other cryptocurrencies. In contrast, algorithmic stablecoins, such as TerraUSD before its
implosion, rely on complex algorithms that automatically rebalance supply to maintain their
value relative to the target currency or asset. To avoid reliance on fiat currency, they often do so
by providing users with an arbitrage opportunity relative to another cryptocurrency.
Despite their name, stablecoins – in particular, algorithmic ones – are less stable than their
issuers claim. In May 2022, TerraUSD entered a death spiral, as its value dropped from $1 to just
a few cents over the course of a few days. In the aftermath, other algorithmic stablecoins came
under pressure. But so did some asset-backed stablecoins, which have seen large-scale
redemptions, temporarily losing their peg in the wake of the shock. Redemptions were more
pronounced among stablecoins whose issuers did not disclose the composition of reserve assets
in detail, presumably reflecting investors' worries that such issuers might not be able to guarantee
conversion at par.
Indeed, commentators have warned for some time that there is an inherent conflict of
interest in stablecoins, with an incentive for issuers to invest in riskier assets. Economic history
is littered with attempts at private money that failed, leading to losses for investors and the real
economy. The robustness of stablecoin stabilisation mechanisms depends crucially on the quality
and transparency of their reserve assets, which are often woefully lacking.8
Yet even if stablecoins were to remain stable to some extent, they lack the qualities
necessary to underpin the future monetary system. They must import their credibility from
sovereign fiat currencies, but they benefit neither from the regulatory requirements and
protections of bank deposits and e-money, nor from the central bank as a lender of last resort. In
addition, they tie up liquidity and can fragment the monetary system, thus undermining the
singleness of the currency.9 As stablecoins are barely used to pay for real-world goods and
services, but underpin the largely self-referential DeFi ecosystem, some have questioned whether
stablecoins should be banned.10 As will be discussed below, there is more promise in sounder
representations of central bank money and liabilities of regulated issuers.
A key development in the crypto universe is the rise of decentralised finance, or "DeFi".
DeFi offers financial service and products, but with the declared objective of refashioning the
financial system by cutting out the middlemen and thereby lowering costs.6 To this end, DeFi
applications publicly record pseudo-anonymous transactions in cryptocurrencies on
permissionless blockchains. "Decentralised applications" (dApps) featuring smart contracts allow
transactions to be automated. To reach consensus, validators are incentivised through rewards.
While the DeFi ecosystem is evolving rapidly, the main types of financial activity
continue to be those already available in traditional finance, such as lending, trading and
insurance.7 Lending platforms let users lend out their stablecoins with interest to borrowers that
post other cryptocurrencies as collateral. Decentralised exchanges (DEXs) represent
marketplaces where transactions occur directly between cryptocurrency or stablecoin traders,
with prices determined via algorithms. On DeFi insurance platforms, users can insure themselves
against eg the mishandling of private keys, exchange hacks or smart contract failures. As
activities almost exclusively involve exchanging one stablecoin or cryptocurrency for another,
and do not finance productive investments in the real economy, the system is mostly self-
referential.
Stablecoins play a key role in the DeFi ecosystem. These are so-called because they are
usually pegged to a numeraire, such as the US dollar, but can also target the price of other
currencies or assets (eg gold). In this sense, they often import the credibility provided by the unit
of account issued by the central bank. Their main use case is to overcome the high price
volatility and low liquidity of unbacked cryptocurrencies, like Bitcoin. Their use also avoids
frequent conversion between cryptocurrencies and bank deposits in sovereign currency, which is
usually associated with significant fees. Because stablecoins are used to support a wide range of
DeFi activities, turnover in stablecoins generally dwarfs that of other cryptocurrencies.
The two main types of stablecoin are asset-backed and algorithmic. Asset-backed
stablecoins, such as Tether, USD Coin and Binance USD, are typically managed by a centralised
intermediary who invests the underlying collateral and coordinates the coins' redemption and
creation. Assets can be held in government bonds, short-term corporate debt or bank deposits, or
in other cryptocurrencies. In contrast, algorithmic stablecoins, such as TerraUSD before its
implosion, rely on complex algorithms that automatically rebalance supply to maintain their
value relative to the target currency or asset. To avoid reliance on fiat currency, they often do so
by providing users with an arbitrage opportunity relative to another cryptocurrency.
Despite their name, stablecoins – in particular, algorithmic ones – are less stable than their
issuers claim. In May 2022, TerraUSD entered a death spiral, as its value dropped from $1 to just
a few cents over the course of a few days. In the aftermath, other algorithmic stablecoins came
under pressure. But so did some asset-backed stablecoins, which have seen large-scale
redemptions, temporarily losing their peg in the wake of the shock. Redemptions were more
pronounced among stablecoins whose issuers did not disclose the composition of reserve assets
in detail, presumably reflecting investors' worries that such issuers might not be able to guarantee
conversion at par.
Indeed, commentators have warned for some time that there is an inherent conflict of
interest in stablecoins, with an incentive for issuers to invest in riskier assets. Economic history
is littered with attempts at private money that failed, leading to losses for investors and the real
economy. The robustness of stablecoin stabilisation mechanisms depends crucially on the quality
and transparency of their reserve assets, which are often woefully lacking.8
Yet even if stablecoins were to remain stable to some extent, they lack the qualities
necessary to underpin the future monetary system. They must import their credibility from
sovereign fiat currencies, but they benefit neither from the regulatory requirements and
protections of bank deposits and e-money, nor from the central bank as a lender of last resort. In
addition, they tie up liquidity and can fragment the monetary system, thus undermining the
singleness of the currency.9 As stablecoins are barely used to pay for real-world goods and
services, but underpin the largely self-referential DeFi ecosystem, some have questioned whether
stablecoins should be banned.10 As will be discussed below, there is more promise in sounder
representations of central bank money and liabilities of regulated issuers.
A key development in the crypto universe is the rise of decentralised finance, or "DeFi".
DeFi offers financial service and products, but with the declared objective of refashioning the
financial system by cutting out the middlemen and thereby lowering costs.6 To this end, DeFi
applications publicly record pseudo-anonymous transactions in cryptocurrencies on
permissionless blockchains. "Decentralised applications" (dApps) featuring smart contracts allow
transactions to be automated. To reach consensus, validators are incentivised through rewards.
While the DeFi ecosystem is evolving rapidly, the main types of financial activity
continue to be those already available in traditional finance, such as lending, trading and
insurance.7 Lending platforms let users lend out their stablecoins with interest to borrowers that
post other cryptocurrencies as collateral. Decentralised exchanges (DEXs) represent
marketplaces where transactions occur directly between cryptocurrency or stablecoin traders,
with prices determined via algorithms. On DeFi insurance platforms, users can insure themselves
against eg the mishandling of private keys, exchange hacks or smart contract failures. As
activities almost exclusively involve exchanging one stablecoin or cryptocurrency for another,
and do not finance productive investments in the real economy, the system is mostly self-
referential.
Stablecoins play a key role in the DeFi ecosystem. These are so-called because they are
usually pegged to a numeraire, such as the US dollar, but can also target the price of other
currencies or assets (eg gold). In this sense, they often import the credibility provided by the unit
of account issued by the central bank. Their main use case is to overcome the high price
volatility and low liquidity of unbacked cryptocurrencies, like Bitcoin. Their use also avoids
frequent conversion between cryptocurrencies and bank deposits in sovereign currency, which is
usually associated with significant fees. Because stablecoins are used to support a wide range of
DeFi activities, turnover in stablecoins generally dwarfs that of other cryptocurrencies.
The two main types of stablecoin are asset-backed and algorithmic. Asset-backed
stablecoins, such as Tether, USD Coin and Binance USD, are typically managed by a centralised
intermediary who invests the underlying collateral and coordinates the coins' redemption and
creation. Assets can be held in government bonds, short-term corporate debt or bank deposits, or
in other cryptocurrencies. In contrast, algorithmic stablecoins, such as TerraUSD before its
implosion, rely on complex algorithms that automatically rebalance supply to maintain their
value relative to the target currency or asset. To avoid reliance on fiat currency, they often do so
by providing users with an arbitrage opportunity relative to another cryptocurrency.
Despite their name, stablecoins – in particular, algorithmic ones – are less stable than their
issuers claim. In May 2022, TerraUSD entered a death spiral, as its value dropped from $1 to just
a few cents over the course of a few days. In the aftermath, other algorithmic stablecoins came
under pressure. But so did some asset-backed stablecoins, which have seen large-scale
redemptions, temporarily losing their peg in the wake of the shock. Redemptions were more
pronounced among stablecoins whose issuers did not disclose the composition of reserve assets
in detail, presumably reflecting investors' worries that such issuers might not be able to guarantee
conversion at par.
Indeed, commentators have warned for some time that there is an inherent conflict of
interest in stablecoins, with an incentive for issuers to invest in riskier assets. Economic history
is littered with attempts at private money that failed, leading to losses for investors and the real
economy. The robustness of stablecoin stabilisation mechanisms depends crucially on the quality
and transparency of their reserve assets, which are often woefully lacking.8
Yet even if stablecoins were to remain stable to some extent, they lack the qualities
necessary to underpin the future monetary system. They must import their credibility from
sovereign fiat currencies, but they benefit neither from the regulatory requirements and
protections of bank deposits and e-money, nor from the central bank as a lender of last resort. In
addition, they tie up liquidity and can fragment the monetary system, thus undermining the
singleness of the currency.9 As stablecoins are barely used to pay for real-world goods and
services, but underpin the largely self-referential DeFi ecosystem, some have questioned whether
stablecoins should be banned.10 As will be discussed below, there is more promise in sounder
representations of central bank money and liabilities of regulated issuers.
A key development in the crypto universe is the rise of decentralised finance, or "DeFi".
DeFi offers financial service and products, but with the declared objective of refashioning the
financial system by cutting out the middlemen and thereby lowering costs.6 To this end, DeFi
applications publicly record pseudo-anonymous transactions in cryptocurrencies on
permissionless blockchains. "Decentralised applications" (dApps) featuring smart contracts allow
transactions to be automated. To reach consensus, validators are incentivised through rewards.
While the DeFi ecosystem is evolving rapidly, the main types of financial activity
continue to be those already available in traditional finance, such as lending, trading and
insurance.7 Lending platforms let users lend out their stablecoins with interest to borrowers that
post other cryptocurrencies as collateral. Decentralised exchanges (DEXs) represent
marketplaces where transactions occur directly between cryptocurrency or stablecoin traders,
with prices determined via algorithms. On DeFi insurance platforms, users can insure themselves
against eg the mishandling of private keys, exchange hacks or smart contract failures. As
activities almost exclusively involve exchanging one stablecoin or cryptocurrency for another,
and do not finance productive investments in the real economy, the system is mostly self-
referential.
Stablecoins play a key role in the DeFi ecosystem. These are so-called because they are
usually pegged to a numeraire, such as the US dollar, but can also target the price of other
currencies or assets (eg gold). In this sense, they often import the credibility provided by the unit
of account issued by the central bank. Their main use case is to overcome the high price
volatility and low liquidity of unbacked cryptocurrencies, like Bitcoin. Their use also avoids
frequent conversion between cryptocurrencies and bank deposits in sovereign currency, which is
usually associated with significant fees. Because stablecoins are used to support a wide range of
DeFi activities, turnover in stablecoins generally dwarfs that of other cryptocurrencies.
The two main types of stablecoin are asset-backed and algorithmic. Asset-backed
stablecoins, such as Tether, USD Coin and Binance USD, are typically managed by a centralised
intermediary who invests the underlying collateral and coordinates the coins' redemption and
creation. Assets can be held in government bonds, short-term corporate debt or bank deposits, or
in other cryptocurrencies. In contrast, algorithmic stablecoins, such as TerraUSD before its
implosion, rely on complex algorithms that automatically rebalance supply to maintain their
value relative to the target currency or asset. To avoid reliance on fiat currency, they often do so
by providing users with an arbitrage opportunity relative to another cryptocurrency.
Despite their name, stablecoins – in particular, algorithmic ones – are less stable than their
issuers claim. In May 2022, TerraUSD entered a death spiral, as its value dropped from $1 to just
a few cents over the course of a few days. In the aftermath, other algorithmic stablecoins came
under pressure. But so did some asset-backed stablecoins, which have seen large-scale
redemptions, temporarily losing their peg in the wake of the shock. Redemptions were more
pronounced among stablecoins whose issuers did not disclose the composition of reserve assets
in detail, presumably reflecting investors' worries that such issuers might not be able to guarantee
conversion at par.
Indeed, commentators have warned for some time that there is an inherent conflict of
interest in stablecoins, with an incentive for issuers to invest in riskier assets. Economic history
is littered with attempts at private money that failed, leading to losses for investors and the real
economy. The robustness of stablecoin stabilisation mechanisms depends crucially on the quality
and transparency of their reserve assets, which are often woefully lacking.8
Yet even if stablecoins were to remain stable to some extent, they lack the qualities
necessary to underpin the future monetary system. They must import their credibility from
sovereign fiat currencies, but they benefit neither from the regulatory requirements and
protections of bank deposits and e-money, nor from the central bank as a lender of last resort. In
addition, they tie up liquidity and can fragment the monetary system, thus undermining the
singleness of the currency.9 As stablecoins are barely used to pay for real-world goods and
services, but underpin the largely self-referential DeFi ecosystem, some have questioned whether
stablecoins should be banned.10 As will be discussed below, there is more promise in sounder
representations of central bank money and liabilities of regulated issuers.
A key development in the crypto universe is the rise of decentralised finance, or "DeFi".
DeFi offers financial service and products, but with the declared objective of refashioning the
financial system by cutting out the middlemen and thereby lowering costs.6 To this end, DeFi
applications publicly record pseudo-anonymous transactions in cryptocurrencies on
permissionless blockchains. "Decentralised applications" (dApps) featuring smart contracts allow
transactions to be automated. To reach consensus, validators are incentivised through rewards.
While the DeFi ecosystem is evolving rapidly, the main types of financial activity
continue to be those already available in traditional finance, such as lending, trading and
insurance.7 Lending platforms let users lend out their stablecoins with interest to borrowers that
post other cryptocurrencies as collateral. Decentralised exchanges (DEXs) represent
marketplaces where transactions occur directly between cryptocurrency or stablecoin traders,
with prices determined via algorithms. On DeFi insurance platforms, users can insure themselves
against eg the mishandling of private keys, exchange hacks or smart contract failures. As
activities almost exclusively involve exchanging one stablecoin or cryptocurrency for another,
and do not finance productive investments in the real economy, the system is mostly self-
referential.
Stablecoins play a key role in the DeFi ecosystem. These are so-called because they are
usually pegged to a numeraire, such as the US dollar, but can also target the price of other
currencies or assets (eg gold). In this sense, they often import the credibility provided by the unit
of account issued by the central bank. Their main use case is to overcome the high price
volatility and low liquidity of unbacked cryptocurrencies, like Bitcoin. Their use also avoids
frequent conversion between cryptocurrencies and bank deposits in sovereign currency, which is
usually associated with significant fees. Because stablecoins are used to support a wide range of
DeFi activities, turnover in stablecoins generally dwarfs that of other cryptocurrencies.
The two main types of stablecoin are asset-backed and algorithmic. Asset-backed
stablecoins, such as Tether, USD Coin and Binance USD, are typically managed by a centralised
intermediary who invests the underlying collateral and coordinates the coins' redemption and
creation. Assets can be held in government bonds, short-term corporate debt or bank deposits, or
in other cryptocurrencies. In contrast, algorithmic stablecoins, such as TerraUSD before its
implosion, rely on complex algorithms that automatically rebalance supply to maintain their
value relative to the target currency or asset. To avoid reliance on fiat currency, they often do so
by providing users with an arbitrage opportunity relative to another cryptocurrency.
Despite their name, stablecoins – in particular, algorithmic ones – are less stable than their
issuers claim. In May 2022, TerraUSD entered a death spiral, as its value dropped from $1 to just
a few cents over the course of a few days. In the aftermath, other algorithmic stablecoins came
under pressure. But so did some asset-backed stablecoins, which have seen large-scale
redemptions, temporarily losing their peg in the wake of the shock. Redemptions were more
pronounced among stablecoins whose issuers did not disclose the composition of reserve assets
in detail, presumably reflecting investors' worries that such issuers might not be able to guarantee
conversion at par.
Indeed, commentators have warned for some time that there is an inherent conflict of
interest in stablecoins, with an incentive for issuers to invest in riskier assets. Economic history
is littered with attempts at private money that failed, leading to losses for investors and the real
economy. The robustness of stablecoin stabilisation mechanisms depends crucially on the quality
and transparency of their reserve assets, which are often woefully lacking.8
Yet even if stablecoins were to remain stable to some extent, they lack the qualities
necessary to underpin the future monetary system. They must import their credibility from
sovereign fiat currencies, but they benefit neither from the regulatory requirements and
protections of bank deposits and e-money, nor from the central bank as a lender of last resort. In
addition, they tie up liquidity and can fragment the monetary system, thus undermining the
singleness of the currency.9 As stablecoins are barely used to pay for real-world goods and
services, but underpin the largely self-referential DeFi ecosystem, some have questioned whether
stablecoins should be banned.10 As will be discussed below, there is more promise in sounder
representations of central bank money and liabilities of regulated issuers.
A key development in the crypto universe is the rise of decentralised finance, or "DeFi".
DeFi offers financial service and products, but with the declared objective of refashioning the
financial system by cutting out the middlemen and thereby lowering costs.6 To this end, DeFi
applications publicly record pseudo-anonymous transactions in cryptocurrencies on
permissionless blockchains. "Decentralised applications" (dApps) featuring smart contracts allow
transactions to be automated. To reach consensus, validators are incentivised through rewards.
While the DeFi ecosystem is evolving rapidly, the main types of financial activity
continue to be those already available in traditional finance, such as lending, trading and
insurance.7 Lending platforms let users lend out their stablecoins with interest to borrowers that
post other cryptocurrencies as collateral. Decentralised exchanges (DEXs) represent
marketplaces where transactions occur directly between cryptocurrency or stablecoin traders,
with prices determined via algorithms. On DeFi insurance platforms, users can insure themselves
against eg the mishandling of private keys, exchange hacks or smart contract failures. As
activities almost exclusively involve exchanging one stablecoin or cryptocurrency for another,
and do not finance productive investments in the real economy, the system is mostly self-
referential.
Stablecoins play a key role in the DeFi ecosystem. These are so-called because they are
usually pegged to a numeraire, such as the US dollar, but can also target the price of other
currencies or assets (eg gold). In this sense, they often import the credibility provided by the unit
of account issued by the central bank. Their main use case is to overcome the high price
volatility and low liquidity of unbacked cryptocurrencies, like Bitcoin. Their use also avoids
frequent conversion between cryptocurrencies and bank deposits in sovereign currency, which is
usually associated with significant fees. Because stablecoins are used to support a wide range of
DeFi activities, turnover in stablecoins generally dwarfs that of other cryptocurrencies.
The two main types of stablecoin are asset-backed and algorithmic. Asset-backed
stablecoins, such as Tether, USD Coin and Binance USD, are typically managed by a centralised
intermediary who invests the underlying collateral and coordinates the coins' redemption and
creation. Assets can be held in government bonds, short-term corporate debt or bank deposits, or
in other cryptocurrencies. In contrast, algorithmic stablecoins, such as TerraUSD before its
implosion, rely on complex algorithms that automatically rebalance supply to maintain their
value relative to the target currency or asset. To avoid reliance on fiat currency, they often do so
by providing users with an arbitrage opportunity relative to another cryptocurrency.
Despite their name, stablecoins – in particular, algorithmic ones – are less stable than their
issuers claim. In May 2022, TerraUSD entered a death spiral, as its value dropped from $1 to just
a few cents over the course of a few days. In the aftermath, other algorithmic stablecoins came
under pressure. But so did some asset-backed stablecoins, which have seen large-scale
redemptions, temporarily losing their peg in the wake of the shock. Redemptions were more
pronounced among stablecoins whose issuers did not disclose the composition of reserve assets
in detail, presumably reflecting investors' worries that such issuers might not be able to guarantee
conversion at par.
Indeed, commentators have warned for some time that there is an inherent conflict of
interest in stablecoins, with an incentive for issuers to invest in riskier assets. Economic history
is littered with attempts at private money that failed, leading to losses for investors and the real
economy. The robustness of stablecoin stabilisation mechanisms depends crucially on the quality
and transparency of their reserve assets, which are often woefully lacking.8
Yet even if stablecoins were to remain stable to some extent, they lack the qualities
necessary to underpin the future monetary system. They must import their credibility from
sovereign fiat currencies, but they benefit neither from the regulatory requirements and
protections of bank deposits and e-money, nor from the central bank as a lender of last resort. In
addition, they tie up liquidity and can fragment the monetary system, thus undermining the
singleness of the currency.9 As stablecoins are barely used to pay for real-world goods and
services, but underpin the largely self-referential DeFi ecosystem, some have questioned whether
stablecoins should be banned.10 As will be discussed below, there is more promise in sounder
representations of central bank money and liabilities of regulated issuers.
A key development in the crypto universe is the rise of decentralised finance, or "DeFi".
DeFi offers financial service and products, but with the declared objective of refashioning the
financial system by cutting out the middlemen and thereby lowering costs.6 To this end, DeFi
applications publicly record pseudo-anonymous transactions in cryptocurrencies on
permissionless blockchains. "Decentralised applications" (dApps) featuring smart contracts allow
transactions to be automated. To reach consensus, validators are incentivised through rewards.
While the DeFi ecosystem is evolving rapidly, the main types of financial activity
continue to be those already available in traditional finance, such as lending, trading and
insurance.7 Lending platforms let users lend out their stablecoins with interest to borrowers that
post other cryptocurrencies as collateral. Decentralised exchanges (DEXs) represent
marketplaces where transactions occur directly between cryptocurrency or stablecoin traders,
with prices determined via algorithms. On DeFi insurance platforms, users can insure themselves
against eg the mishandling of private keys, exchange hacks or smart contract failures. As
activities almost exclusively involve exchanging one stablecoin or cryptocurrency for another,
and do not finance productive investments in the real economy, the system is mostly self-
referential.
Stablecoins play a key role in the DeFi ecosystem. These are so-called because they are
usually pegged to a numeraire, such as the US dollar, but can also target the price of other
currencies or assets (eg gold). In this sense, they often import the credibility provided by the unit
of account issued by the central bank. Their main use case is to overcome the high price
volatility and low liquidity of unbacked cryptocurrencies, like Bitcoin. Their use also avoids
frequent conversion between cryptocurrencies and bank deposits in sovereign currency, which is
usually associated with significant fees. Because stablecoins are used to support a wide range of
DeFi activities, turnover in stablecoins generally dwarfs that of other cryptocurrencies.
The two main types of stablecoin are asset-backed and algorithmic. Asset-backed
stablecoins, such as Tether, USD Coin and Binance USD, are typically managed by a centralised
intermediary who invests the underlying collateral and coordinates the coins' redemption and
creation. Assets can be held in government bonds, short-term corporate debt or bank deposits, or
in other cryptocurrencies. In contrast, algorithmic stablecoins, such as TerraUSD before its
implosion, rely on complex algorithms that automatically rebalance supply to maintain their
value relative to the target currency or asset. To avoid reliance on fiat currency, they often do so
by providing users with an arbitrage opportunity relative to another cryptocurrency.
Despite their name, stablecoins – in particular, algorithmic ones – are less stable than their
issuers claim. In May 2022, TerraUSD entered a death spiral, as its value dropped from $1 to just
a few cents over the course of a few days. In the aftermath, other algorithmic stablecoins came
under pressure. But so did some asset-backed stablecoins, which have seen large-scale
redemptions, temporarily losing their peg in the wake of the shock. Redemptions were more
pronounced among stablecoins whose issuers did not disclose the composition of reserve assets
in detail, presumably reflecting investors' worries that such issuers might not be able to guarantee
conversion at par.
Indeed, commentators have warned for some time that there is an inherent conflict of
interest in stablecoins, with an incentive for issuers to invest in riskier assets. Economic history
is littered with attempts at private money that failed, leading to losses for investors and the real
economy. The robustness of stablecoin stabilisation mechanisms depends crucially on the quality
and transparency of their reserve assets, which are often woefully lacking.8
Yet even if stablecoins were to remain stable to some extent, they lack the qualities
necessary to underpin the future monetary system. They must import their credibility from
sovereign fiat currencies, but they benefit neither from the regulatory requirements and
protections of bank deposits and e-money, nor from the central bank as a lender of last resort. In
addition, they tie up liquidity and can fragment the monetary system, thus undermining the
singleness of the currency.9 As stablecoins are barely used to pay for real-world goods and
services, but underpin the largely self-referential DeFi ecosystem, some have questioned whether
stablecoins should be banned.10 As will be discussed below, there is more promise in sounder
representations of central bank money and liabilities of regulated issuers.
A key development in the crypto universe is the rise of decentralised finance, or "DeFi".
DeFi offers financial service and products, but with the declared objective of refashioning the
financial system by cutting out the middlemen and thereby lowering costs.6 To this end, DeFi
applications publicly record pseudo-anonymous transactions in cryptocurrencies on
permissionless blockchains. "Decentralised applications" (dApps) featuring smart contracts allow
transactions to be automated. To reach consensus, validators are incentivised through rewards.
While the DeFi ecosystem is evolving rapidly, the main types of financial activity
continue to be those already available in traditional finance, such as lending, trading and
insurance.7 Lending platforms let users lend out their stablecoins with interest to borrowers that
post other cryptocurrencies as collateral. Decentralised exchanges (DEXs) represent
marketplaces where transactions occur directly between cryptocurrency or stablecoin traders,
with prices determined via algorithms. On DeFi insurance platforms, users can insure themselves
against eg the mishandling of private keys, exchange hacks or smart contract failures. As
activities almost exclusively involve exchanging one stablecoin or cryptocurrency for another,
and do not finance productive investments in the real economy, the system is mostly self-
referential.
Stablecoins play a key role in the DeFi ecosystem. These are so-called because they are
usually pegged to a numeraire, such as the US dollar, but can also target the price of other
currencies or assets (eg gold). In this sense, they often import the credibility provided by the unit
of account issued by the central bank. Their main use case is to overcome the high price
volatility and low liquidity of unbacked cryptocurrencies, like Bitcoin. Their use also avoids
frequent conversion between cryptocurrencies and bank deposits in sovereign currency, which is
usually associated with significant fees. Because stablecoins are used to support a wide range of
DeFi activities, turnover in stablecoins generally dwarfs that of other cryptocurrencies.
The two main types of stablecoin are asset-backed and algorithmic. Asset-backed
stablecoins, such as Tether, USD Coin and Binance USD, are typically managed by a centralised
intermediary who invests the underlying collateral and coordinates the coins' redemption and
creation. Assets can be held in government bonds, short-term corporate debt or bank deposits, or
in other cryptocurrencies. In contrast, algorithmic stablecoins, such as TerraUSD before its
implosion, rely on complex algorithms that automatically rebalance supply to maintain their
value relative to the target currency or asset. To avoid reliance on fiat currency, they often do so
by providing users with an arbitrage opportunity relative to another cryptocurrency.
Despite their name, stablecoins – in particular, algorithmic ones – are less stable than their
issuers claim. In May 2022, TerraUSD entered a death spiral, as its value dropped from $1 to just
a few cents over the course of a few days. In the aftermath, other algorithmic stablecoins came
under pressure. But so did some asset-backed stablecoins, which have seen large-scale
redemptions, temporarily losing their peg in the wake of the shock. Redemptions were more
pronounced among stablecoins whose issuers did not disclose the composition of reserve assets
in detail, presumably reflecting investors' worries that such issuers might not be able to guarantee
conversion at par.
Indeed, commentators have warned for some time that there is an inherent conflict of
interest in stablecoins, with an incentive for issuers to invest in riskier assets. Economic history
is littered with attempts at private money that failed, leading to losses for investors and the real
economy. The robustness of stablecoin stabilisation mechanisms depends crucially on the quality
and transparency of their reserve assets, which are often woefully lacking.8
Yet even if stablecoins were to remain stable to some extent, they lack the qualities
necessary to underpin the future monetary system. They must import their credibility from
sovereign fiat currencies, but they benefit neither from the regulatory requirements and
protections of bank deposits and e-money, nor from the central bank as a lender of last resort. In
addition, they tie up liquidity and can fragment the monetary system, thus undermining the
singleness of the currency.9 As stablecoins are barely used to pay for real-world goods and
services, but underpin the largely self-referential DeFi ecosystem, some have questioned whether
stablecoins should be banned.10 As will be discussed below, there is more promise in sounder
representations of central bank money and liabilities of regulated issuers.
A key development in the crypto universe is the rise of decentralised finance, or "DeFi".
DeFi offers financial service and products, but with the declared objective of refashioning the
financial system by cutting out the middlemen and thereby lowering costs.6 To this end, DeFi
applications publicly record pseudo-anonymous transactions in cryptocurrencies on
permissionless blockchains. "Decentralised applications" (dApps) featuring smart contracts allow
transactions to be automated. To reach consensus, validators are incentivised through rewards.
While the DeFi ecosystem is evolving rapidly, the main types of financial activity
continue to be those already available in traditional finance, such as lending, trading and
insurance.7 Lending platforms let users lend out their stablecoins with interest to borrowers that
post other cryptocurrencies as collateral. Decentralised exchanges (DEXs) represent
marketplaces where transactions occur directly between cryptocurrency or stablecoin traders,
with prices determined via algorithms. On DeFi insurance platforms, users can insure themselves
against eg the mishandling of private keys, exchange hacks or smart contract failures. As
activities almost exclusively involve exchanging one stablecoin or cryptocurrency for another,
and do not finance productive investments in the real economy, the system is mostly self-
referential.
Stablecoins play a key role in the DeFi ecosystem. These are so-called because they are
usually pegged to a numeraire, such as the US dollar, but can also target the price of other
currencies or assets (eg gold). In this sense, they often import the credibility provided by the unit
of account issued by the central bank. Their main use case is to overcome the high price
volatility and low liquidity of unbacked cryptocurrencies, like Bitcoin. Their use also avoids
frequent conversion between cryptocurrencies and bank deposits in sovereign currency, which is
usually associated with significant fees. Because stablecoins are used to support a wide range of
DeFi activities, turnover in stablecoins generally dwarfs that of other cryptocurrencies.
The two main types of stablecoin are asset-backed and algorithmic. Asset-backed
stablecoins, such as Tether, USD Coin and Binance USD, are typically managed by a centralised
intermediary who invests the underlying collateral and coordinates the coins' redemption and
creation. Assets can be held in government bonds, short-term corporate debt or bank deposits, or
in other cryptocurrencies. In contrast, algorithmic stablecoins, such as TerraUSD before its
implosion, rely on complex algorithms that automatically rebalance supply to maintain their
value relative to the target currency or asset. To avoid reliance on fiat currency, they often do so
by providing users with an arbitrage opportunity relative to another cryptocurrency.
Despite their name, stablecoins – in particular, algorithmic ones – are less stable than their
issuers claim. In May 2022, TerraUSD entered a death spiral, as its value dropped from $1 to just
a few cents over the course of a few days. In the aftermath, other algorithmic stablecoins came
under pressure. But so did some asset-backed stablecoins, which have seen large-scale
redemptions, temporarily losing their peg in the wake of the shock. Redemptions were more
pronounced among stablecoins whose issuers did not disclose the composition of reserve assets
in detail, presumably reflecting investors' worries that such issuers might not be able to guarantee
conversion at par.
Indeed, commentators have warned for some time that there is an inherent conflict of
interest in stablecoins, with an incentive for issuers to invest in riskier assets. Economic history
is littered with attempts at private money that failed, leading to losses for investors and the real
economy. The robustness of stablecoin stabilisation mechanisms depends crucially on the quality
and transparency of their reserve assets, which are often woefully lacking.8
Yet even if stablecoins were to remain stable to some extent, they lack the qualities
necessary to underpin the future monetary system. They must import their credibility from
sovereign fiat currencies, but they benefit neither from the regulatory requirements and
protections of bank deposits and e-money, nor from the central bank as a lender of last resort. In
addition, they tie up liquidity and can fragment the monetary system, thus undermining the
singleness of the currency.9 As stablecoins are barely used to pay for real-world goods and
services, but underpin the largely self-referential DeFi ecosystem, some have questioned whether
stablecoins should be banned.10 As will be discussed below, there is more promise in sounder
representations of central bank money and liabilities of regulated issuers.
A key development in the crypto universe is the rise of decentralised finance, or "DeFi".
DeFi offers financial service and products, but with the declared objective of refashioning the
financial system by cutting out the middlemen and thereby lowering costs.6 To this end, DeFi
applications publicly record pseudo-anonymous transactions in cryptocurrencies on
permissionless blockchains. "Decentralised applications" (dApps) featuring smart contracts allow
transactions to be automated. To reach consensus, validators are incentivised through rewards.
While the DeFi ecosystem is evolving rapidly, the main types of financial activity
continue to be those already available in traditional finance, such as lending, trading and
insurance.7 Lending platforms let users lend out their stablecoins with interest to borrowers that
post other cryptocurrencies as collateral. Decentralised exchanges (DEXs) represent
marketplaces where transactions occur directly between cryptocurrency or stablecoin traders,
with prices determined via algorithms. On DeFi insurance platforms, users can insure themselves
against eg the mishandling of private keys, exchange hacks or smart contract failures. As
activities almost exclusively involve exchanging one stablecoin or cryptocurrency for another,
and do not finance productive investments in the real economy, the system is mostly self-
referential.
Stablecoins play a key role in the DeFi ecosystem. These are so-called because they are
usually pegged to a numeraire, such as the US dollar, but can also target the price of other
currencies or assets (eg gold). In this sense, they often import the credibility provided by the unit
of account issued by the central bank. Their main use case is to overcome the high price
volatility and low liquidity of unbacked cryptocurrencies, like Bitcoin. Their use also avoids
frequent conversion between cryptocurrencies and bank deposits in sovereign currency, which is
usually associated with significant fees. Because stablecoins are used to support a wide range of
DeFi activities, turnover in stablecoins generally dwarfs that of other cryptocurrencies.
The two main types of stablecoin are asset-backed and algorithmic. Asset-backed
stablecoins, such as Tether, USD Coin and Binance USD, are typically managed by a centralised
intermediary who invests the underlying collateral and coordinates the coins' redemption and
creation. Assets can be held in government bonds, short-term corporate debt or bank deposits, or
in other cryptocurrencies. In contrast, algorithmic stablecoins, such as TerraUSD before its
implosion, rely on complex algorithms that automatically rebalance supply to maintain their
value relative to the target currency or asset. To avoid reliance on fiat currency, they often do so
by providing users with an arbitrage opportunity relative to another cryptocurrency.
Despite their name, stablecoins – in particular, algorithmic ones – are less stable than their
issuers claim. In May 2022, TerraUSD entered a death spiral, as its value dropped from $1 to just
a few cents over the course of a few days. In the aftermath, other algorithmic stablecoins came
under pressure. But so did some asset-backed stablecoins, which have seen large-scale
redemptions, temporarily losing their peg in the wake of the shock. Redemptions were more
pronounced among stablecoins whose issuers did not disclose the composition of reserve assets
in detail, presumably reflecting investors' worries that such issuers might not be able to guarantee
conversion at par.
Indeed, commentators have warned for some time that there is an inherent conflict of
interest in stablecoins, with an incentive for issuers to invest in riskier assets. Economic history
is littered with attempts at private money that failed, leading to losses for investors and the real
economy. The robustness of stablecoin stabilisation mechanisms depends crucially on the quality
and transparency of their reserve assets, which are often woefully lacking.8
Yet even if stablecoins were to remain stable to some extent, they lack the qualities
necessary to underpin the future monetary system. They must import their credibility from
sovereign fiat currencies, but they benefit neither from the regulatory requirements and
protections of bank deposits and e-money, nor from the central bank as a lender of last resort. In
addition, they tie up liquidity and can fragment the monetary system, thus undermining the
singleness of the currency.9 As stablecoins are barely used to pay for real-world goods and
services, but underpin the largely self-referential DeFi ecosystem, some have questioned whether
stablecoins should be banned.10 As will be discussed below, there is more promise in sounder
representations of central bank money and liabilities of regulated issuers.
A key development in the crypto universe is the rise of decentralised finance, or "DeFi".
DeFi offers financial service and products, but with the declared objective of refashioning the
financial system by cutting out the middlemen and thereby lowering costs.6 To this end, DeFi
applications publicly record pseudo-anonymous transactions in cryptocurrencies on
permissionless blockchains. "Decentralised applications" (dApps) featuring smart contracts allow
transactions to be automated. To reach consensus, validators are incentivised through rewards.
While the DeFi ecosystem is evolving rapidly, the main types of financial activity
continue to be those already available in traditional finance, such as lending, trading and
insurance.7 Lending platforms let users lend out their stablecoins with interest to borrowers that
post other cryptocurrencies as collateral. Decentralised exchanges (DEXs) represent
marketplaces where transactions occur directly between cryptocurrency or stablecoin traders,
with prices determined via algorithms. On DeFi insurance platforms, users can insure themselves
against eg the mishandling of private keys, exchange hacks or smart contract failures. As
activities almost exclusively involve exchanging one stablecoin or cryptocurrency for another,
and do not finance productive investments in the real economy, the system is mostly self-
referential.
Stablecoins play a key role in the DeFi ecosystem. These are so-called because they are
usually pegged to a numeraire, such as the US dollar, but can also target the price of other
currencies or assets (eg gold). In this sense, they often import the credibility provided by the unit
of account issued by the central bank. Their main use case is to overcome the high price
volatility and low liquidity of unbacked cryptocurrencies, like Bitcoin. Their use also avoids
frequent conversion between cryptocurrencies and bank deposits in sovereign currency, which is
usually associated with significant fees. Because stablecoins are used to support a wide range of
DeFi activities, turnover in stablecoins generally dwarfs that of other cryptocurrencies.
The two main types of stablecoin are asset-backed and algorithmic. Asset-backed
stablecoins, such as Tether, USD Coin and Binance USD, are typically managed by a centralised
intermediary who invests the underlying collateral and coordinates the coins' redemption and
creation. Assets can be held in government bonds, short-term corporate debt or bank deposits, or
in other cryptocurrencies. In contrast, algorithmic stablecoins, such as TerraUSD before its
implosion, rely on complex algorithms that automatically rebalance supply to maintain their
value relative to the target currency or asset. To avoid reliance on fiat currency, they often do so
by providing users with an arbitrage opportunity relative to another cryptocurrency.
Despite their name, stablecoins – in particular, algorithmic ones – are less stable than their
issuers claim. In May 2022, TerraUSD entered a death spiral, as its value dropped from $1 to just
a few cents over the course of a few days. In the aftermath, other algorithmic stablecoins came
under pressure. But so did some asset-backed stablecoins, which have seen large-scale
redemptions, temporarily losing their peg in the wake of the shock. Redemptions were more
pronounced among stablecoins whose issuers did not disclose the composition of reserve assets
in detail, presumably reflecting investors' worries that such issuers might not be able to guarantee
conversion at par.
Indeed, commentators have warned for some time that there is an inherent conflict of
interest in stablecoins, with an incentive for issuers to invest in riskier assets. Economic history
is littered with attempts at private money that failed, leading to losses for investors and the real
economy. The robustness of stablecoin stabilisation mechanisms depends crucially on the quality
and transparency of their reserve assets, which are often woefully lacking.8
Yet even if stablecoins were to remain stable to some extent, they lack the qualities
necessary to underpin the future monetary system. They must import their credibility from
sovereign fiat currencies, but they benefit neither from the regulatory requirements and
protections of bank deposits and e-money, nor from the central bank as a lender of last resort. In
addition, they tie up liquidity and can fragment the monetary system, thus undermining the
singleness of the currency.9 As stablecoins are barely used to pay for real-world goods and
services, but underpin the largely self-referential DeFi ecosystem, some have questioned whether
stablecoins should be banned.10 As will be discussed below, there is more promise in sounder
representations of central bank money and liabilities of regulated issuers.
A key development in the crypto universe is the rise of decentralised finance, or "DeFi".
DeFi offers financial service and products, but with the declared objective of refashioning the
financial system by cutting out the middlemen and thereby lowering costs.6 To this end, DeFi
applications publicly record pseudo-anonymous transactions in cryptocurrencies on
permissionless blockchains. "Decentralised applications" (dApps) featuring smart contracts allow
transactions to be automated. To reach consensus, validators are incentivised through rewards.
While the DeFi ecosystem is evolving rapidly, the main types of financial activity
continue to be those already available in traditional finance, such as lending, trading and
insurance.7 Lending platforms let users lend out their stablecoins with interest to borrowers that
post other cryptocurrencies as collateral. Decentralised exchanges (DEXs) represent
marketplaces where transactions occur directly between cryptocurrency or stablecoin traders,
with prices determined via algorithms. On DeFi insurance platforms, users can insure themselves
against eg the mishandling of private keys, exchange hacks or smart contract failures. As
activities almost exclusively involve exchanging one stablecoin or cryptocurrency for another,
and do not finance productive investments in the real economy, the system is mostly self-
referential.
Stablecoins play a key role in the DeFi ecosystem. These are so-called because they are
usually pegged to a numeraire, such as the US dollar, but can also target the price of other
currencies or assets (eg gold). In this sense, they often import the credibility provided by the unit
of account issued by the central bank. Their main use case is to overcome the high price
volatility and low liquidity of unbacked cryptocurrencies, like Bitcoin. Their use also avoids
frequent conversion between cryptocurrencies and bank deposits in sovereign currency, which is
usually associated with significant fees. Because stablecoins are used to support a wide range of
DeFi activities, turnover in stablecoins generally dwarfs that of other cryptocurrencies.
The two main types of stablecoin are asset-backed and algorithmic. Asset-backed
stablecoins, such as Tether, USD Coin and Binance USD, are typically managed by a centralised
intermediary who invests the underlying collateral and coordinates the coins' redemption and
creation. Assets can be held in government bonds, short-term corporate debt or bank deposits, or
in other cryptocurrencies. In contrast, algorithmic stablecoins, such as TerraUSD before its
implosion, rely on complex algorithms that automatically rebalance supply to maintain their
value relative to the target currency or asset. To avoid reliance on fiat currency, they often do so
by providing users with an arbitrage opportunity relative to another cryptocurrency.
Despite their name, stablecoins – in particular, algorithmic ones – are less stable than their
issuers claim. In May 2022, TerraUSD entered a death spiral, as its value dropped from $1 to just
a few cents over the course of a few days. In the aftermath, other algorithmic stablecoins came
under pressure. But so did some asset-backed stablecoins, which have seen large-scale
redemptions, temporarily losing their peg in the wake of the shock. Redemptions were more
pronounced among stablecoins whose issuers did not disclose the composition of reserve assets
in detail, presumably reflecting investors' worries that such issuers might not be able to guarantee
conversion at par.
Indeed, commentators have warned for some time that there is an inherent conflict of
interest in stablecoins, with an incentive for issuers to invest in riskier assets. Economic history
is littered with attempts at private money that failed, leading to losses for investors and the real
economy. The robustness of stablecoin stabilisation mechanisms depends crucially on the quality
and transparency of their reserve assets, which are often woefully lacking.8
Yet even if stablecoins were to remain stable to some extent, they lack the qualities
necessary to underpin the future monetary system. They must import their credibility from
sovereign fiat currencies, but they benefit neither from the regulatory requirements and
protections of bank deposits and e-money, nor from the central bank as a lender of last resort. In
addition, they tie up liquidity and can fragment the monetary system, thus undermining the
singleness of the currency.9 As stablecoins are barely used to pay for real-world goods and
services, but underpin the largely self-referential DeFi ecosystem, some have questioned whether
stablecoins should be banned.10 As will be discussed below, there is more promise in sounder
representations of central bank money and liabilities of regulated issuers.
A key development in the crypto universe is the rise of decentralised finance, or "DeFi".
DeFi offers financial service and products, but with the declared objective of refashioning the
financial system by cutting out the middlemen and thereby lowering costs.6 To this end, DeFi
applications publicly record pseudo-anonymous transactions in cryptocurrencies on
permissionless blockchains. "Decentralised applications" (dApps) featuring smart contracts allow
transactions to be automated. To reach consensus, validators are incentivised through rewards.
While the DeFi ecosystem is evolving rapidly, the main types of financial activity
continue to be those already available in traditional finance, such as lending, trading and
insurance.7 Lending platforms let users lend out their stablecoins with interest to borrowers that
post other cryptocurrencies as collateral. Decentralised exchanges (DEXs) represent
marketplaces where transactions occur directly between cryptocurrency or stablecoin traders,
with prices determined via algorithms. On DeFi insurance platforms, users can insure themselves
against eg the mishandling of private keys, exchange hacks or smart contract failures. As
activities almost exclusively involve exchanging one stablecoin or cryptocurrency for another,
and do not finance productive investments in the real economy, the system is mostly self-
referential.
Stablecoins play a key role in the DeFi ecosystem. These are so-called because they are
usually pegged to a numeraire, such as the US dollar, but can also target the price of other
currencies or assets (eg gold). In this sense, they often import the credibility provided by the unit
of account issued by the central bank. Their main use case is to overcome the high price
volatility and low liquidity of unbacked cryptocurrencies, like Bitcoin. Their use also avoids
frequent conversion between cryptocurrencies and bank deposits in sovereign currency, which is
usually associated with significant fees. Because stablecoins are used to support a wide range of
DeFi activities, turnover in stablecoins generally dwarfs that of other cryptocurrencies.
The two main types of stablecoin are asset-backed and algorithmic. Asset-backed
stablecoins, such as Tether, USD Coin and Binance USD, are typically managed by a centralised
intermediary who invests the underlying collateral and coordinates the coins' redemption and
creation. Assets can be held in government bonds, short-term corporate debt or bank deposits, or
in other cryptocurrencies. In contrast, algorithmic stablecoins, such as TerraUSD before its
implosion, rely on complex algorithms that automatically rebalance supply to maintain their
value relative to the target currency or asset. To avoid reliance on fiat currency, they often do so
by providing users with an arbitrage opportunity relative to another cryptocurrency.
Despite their name, stablecoins – in particular, algorithmic ones – are less stable than their
issuers claim. In May 2022, TerraUSD entered a death spiral, as its value dropped from $1 to just
a few cents over the course of a few days. In the aftermath, other algorithmic stablecoins came
under pressure. But so did some asset-backed stablecoins, which have seen large-scale
redemptions, temporarily losing their peg in the wake of the shock. Redemptions were more
pronounced among stablecoins whose issuers did not disclose the composition of reserve assets
in detail, presumably reflecting investors' worries that such issuers might not be able to guarantee
conversion at par.
Indeed, commentators have warned for some time that there is an inherent conflict of
interest in stablecoins, with an incentive for issuers to invest in riskier assets. Economic history
is littered with attempts at private money that failed, leading to losses for investors and the real
economy. The robustness of stablecoin stabilisation mechanisms depends crucially on the quality
and transparency of their reserve assets, which are often woefully lacking.8
Yet even if stablecoins were to remain stable to some extent, they lack the qualities
necessary to underpin the future monetary system. They must import their credibility from
sovereign fiat currencies, but they benefit neither from the regulatory requirements and
protections of bank deposits and e-money, nor from the central bank as a lender of last resort. In
addition, they tie up liquidity and can fragment the monetary system, thus undermining the
singleness of the currency.9 As stablecoins are barely used to pay for real-world goods and
services, but underpin the largely self-referential DeFi ecosystem, some have questioned whether
stablecoins should be banned.10 As will be discussed below, there is more promise in sounder
representations of central bank money and liabilities of regulated issuers.
A key development in the crypto universe is the rise of decentralised finance, or "DeFi".
DeFi offers financial service and products, but with the declared objective of refashioning the
financial system by cutting out the middlemen and thereby lowering costs.6 To this end, DeFi
applications publicly record pseudo-anonymous transactions in cryptocurrencies on
permissionless blockchains. "Decentralised applications" (dApps) featuring smart contracts allow
transactions to be automated. To reach consensus, validators are incentivised through rewards.
While the DeFi ecosystem is evolving rapidly, the main types of financial activity
continue to be those already available in traditional finance, such as lending, trading and
insurance.7 Lending platforms let users lend out their stablecoins with interest to borrowers that
post other cryptocurrencies as collateral. Decentralised exchanges (DEXs) represent
marketplaces where transactions occur directly between cryptocurrency or stablecoin traders,
with prices determined via algorithms. On DeFi insurance platforms, users can insure themselves
against eg the mishandling of private keys, exchange hacks or smart contract failures. As
activities almost exclusively involve exchanging one stablecoin or cryptocurrency for another,
and do not finance productive investments in the real economy, the system is mostly self-
referential.
Stablecoins play a key role in the DeFi ecosystem. These are so-called because they are
usually pegged to a numeraire, such as the US dollar, but can also target the price of other
currencies or assets (eg gold). In this sense, they often import the credibility provided by the unit
of account issued by the central bank. Their main use case is to overcome the high price
volatility and low liquidity of unbacked cryptocurrencies, like Bitcoin. Their use also avoids
frequent conversion between cryptocurrencies and bank deposits in sovereign currency, which is
usually associated with significant fees. Because stablecoins are used to support a wide range of
DeFi activities, turnover in stablecoins generally dwarfs that of other cryptocurrencies.
The two main types of stablecoin are asset-backed and algorithmic. Asset-backed
stablecoins, such as Tether, USD Coin and Binance USD, are typically managed by a centralised
intermediary who invests the underlying collateral and coordinates the coins' redemption and
creation. Assets can be held in government bonds, short-term corporate debt or bank deposits, or
in other cryptocurrencies. In contrast, algorithmic stablecoins, such as TerraUSD before its
implosion, rely on complex algorithms that automatically rebalance supply to maintain their
value relative to the target currency or asset. To avoid reliance on fiat currency, they often do so
by providing users with an arbitrage opportunity relative to another cryptocurrency.
Despite their name, stablecoins – in particular, algorithmic ones – are less stable than their
issuers claim. In May 2022, TerraUSD entered a death spiral, as its value dropped from $1 to just
a few cents over the course of a few days. In the aftermath, other algorithmic stablecoins came
under pressure. But so did some asset-backed stablecoins, which have seen large-scale
redemptions, temporarily losing their peg in the wake of the shock. Redemptions were more
pronounced among stablecoins whose issuers did not disclose the composition of reserve assets
in detail, presumably reflecting investors' worries that such issuers might not be able to guarantee
conversion at par.
Indeed, commentators have warned for some time that there is an inherent conflict of
interest in stablecoins, with an incentive for issuers to invest in riskier assets. Economic history
is littered with attempts at private money that failed, leading to losses for investors and the real
economy. The robustness of stablecoin stabilisation mechanisms depends crucially on the quality
and transparency of their reserve assets, which are often woefully lacking.8
Yet even if stablecoins were to remain stable to some extent, they lack the qualities
necessary to underpin the future monetary system. They must import their credibility from
sovereign fiat currencies, but they benefit neither from the regulatory requirements and
protections of bank deposits and e-money, nor from the central bank as a lender of last resort. In
addition, they tie up liquidity and can fragment the monetary system, thus undermining the
singleness of the currency.9 As stablecoins are barely used to pay for real-world goods and
services, but underpin the largely self-referential DeFi ecosystem, some have questioned whether
stablecoins should be banned.10 As will be discussed below, there is more promise in sounder
representations of central bank money and liabilities of regulated issuers.
A key development in the crypto universe is the rise of decentralised finance, or "DeFi".
DeFi offers financial service and products, but with the declared objective of refashioning the
financial system by cutting out the middlemen and thereby lowering costs.6 To this end, DeFi
applications publicly record pseudo-anonymous transactions in cryptocurrencies on
permissionless blockchains. "Decentralised applications" (dApps) featuring smart contracts allow
transactions to be automated. To reach consensus, validators are incentivised through rewards.
While the DeFi ecosystem is evolving rapidly, the main types of financial activity
continue to be those already available in traditional finance, such as lending, trading and
insurance.7 Lending platforms let users lend out their stablecoins with interest to borrowers that
post other cryptocurrencies as collateral. Decentralised exchanges (DEXs) represent
marketplaces where transactions occur directly between cryptocurrency or stablecoin traders,
with prices determined via algorithms. On DeFi insurance platforms, users can insure themselves
against eg the mishandling of private keys, exchange hacks or smart contract failures. As
activities almost exclusively involve exchanging one stablecoin or cryptocurrency for another,
and do not finance productive investments in the real economy, the system is mostly self-
referential.
Stablecoins play a key role in the DeFi ecosystem. These are so-called because they are
usually pegged to a numeraire, such as the US dollar, but can also target the price of other
currencies or assets (eg gold). In this sense, they often import the credibility provided by the unit
of account issued by the central bank. Their main use case is to overcome the high price
volatility and low liquidity of unbacked cryptocurrencies, like Bitcoin. Their use also avoids
frequent conversion between cryptocurrencies and bank deposits in sovereign currency, which is
usually associated with significant fees. Because stablecoins are used to support a wide range of
DeFi activities, turnover in stablecoins generally dwarfs that of other cryptocurrencies.
The two main types of stablecoin are asset-backed and algorithmic. Asset-backed
stablecoins, such as Tether, USD Coin and Binance USD, are typically managed by a centralised
intermediary who invests the underlying collateral and coordinates the coins' redemption and
creation. Assets can be held in government bonds, short-term corporate debt or bank deposits, or
in other cryptocurrencies. In contrast, algorithmic stablecoins, such as TerraUSD before its
implosion, rely on complex algorithms that automatically rebalance supply to maintain their
value relative to the target currency or asset. To avoid reliance on fiat currency, they often do so
by providing users with an arbitrage opportunity relative to another cryptocurrency.
Despite their name, stablecoins – in particular, algorithmic ones – are less stable than their
issuers claim. In May 2022, TerraUSD entered a death spiral, as its value dropped from $1 to just
a few cents over the course of a few days. In the aftermath, other algorithmic stablecoins came
under pressure. But so did some asset-backed stablecoins, which have seen large-scale
redemptions, temporarily losing their peg in the wake of the shock. Redemptions were more
pronounced among stablecoins whose issuers did not disclose the composition of reserve assets
in detail, presumably reflecting investors' worries that such issuers might not be able to guarantee
conversion at par.
Indeed, commentators have warned for some time that there is an inherent conflict of
interest in stablecoins, with an incentive for issuers to invest in riskier assets. Economic history
is littered with attempts at private money that failed, leading to losses for investors and the real
economy. The robustness of stablecoin stabilisation mechanisms depends crucially on the quality
and transparency of their reserve assets, which are often woefully lacking.8
Yet even if stablecoins were to remain stable to some extent, they lack the qualities
necessary to underpin the future monetary system. They must import their credibility from
sovereign fiat currencies, but they benefit neither from the regulatory requirements and
protections of bank deposits and e-money, nor from the central bank as a lender of last resort. In
addition, they tie up liquidity and can fragment the monetary system, thus undermining the
singleness of the currency.9 As stablecoins are barely used to pay for real-world goods and
services, but underpin the largely self-referential DeFi ecosystem, some have questioned whether
stablecoins should be banned.10 As will be discussed below, there is more promise in sounder
representations of central bank money and liabilities of regulated issuers.
A key development in the crypto universe is the rise of decentralised finance, or "DeFi".
DeFi offers financial service and products, but with the declared objective of refashioning the
financial system by cutting out the middlemen and thereby lowering costs.6 To this end, DeFi
applications publicly record pseudo-anonymous transactions in cryptocurrencies on
permissionless blockchains. "Decentralised applications" (dApps) featuring smart contracts allow
transactions to be automated. To reach consensus, validators are incentivised through rewards.
While the DeFi ecosystem is evolving rapidly, the main types of financial activity
continue to be those already available in traditional finance, such as lending, trading and
insurance.7 Lending platforms let users lend out their stablecoins with interest to borrowers that
post other cryptocurrencies as collateral. Decentralised exchanges (DEXs) represent
marketplaces where transactions occur directly between cryptocurrency or stablecoin traders,
with prices determined via algorithms. On DeFi insurance platforms, users can insure themselves
against eg the mishandling of private keys, exchange hacks or smart contract failures. As
activities almost exclusively involve exchanging one stablecoin or cryptocurrency for another,
and do not finance productive investments in the real economy, the system is mostly self-
referential.
Stablecoins play a key role in the DeFi ecosystem. These are so-called because they are
usually pegged to a numeraire, such as the US dollar, but can also target the price of other
currencies or assets (eg gold). In this sense, they often import the credibility provided by the unit
of account issued by the central bank. Their main use case is to overcome the high price
volatility and low liquidity of unbacked cryptocurrencies, like Bitcoin. Their use also avoids
frequent conversion between cryptocurrencies and bank deposits in sovereign currency, which is
usually associated with significant fees. Because stablecoins are used to support a wide range of
DeFi activities, turnover in stablecoins generally dwarfs that of other cryptocurrencies.
The two main types of stablecoin are asset-backed and algorithmic. Asset-backed
stablecoins, such as Tether, USD Coin and Binance USD, are typically managed by a centralised
intermediary who invests the underlying collateral and coordinates the coins' redemption and
creation. Assets can be held in government bonds, short-term corporate debt or bank deposits, or
in other cryptocurrencies. In contrast, algorithmic stablecoins, such as TerraUSD before its
implosion, rely on complex algorithms that automatically rebalance supply to maintain their
value relative to the target currency or asset. To avoid reliance on fiat currency, they often do so
by providing users with an arbitrage opportunity relative to another cryptocurrency.
Despite their name, stablecoins – in particular, algorithmic ones – are less stable than their
issuers claim. In May 2022, TerraUSD entered a death spiral, as its value dropped from $1 to just
a few cents over the course of a few days. In the aftermath, other algorithmic stablecoins came
under pressure. But so did some asset-backed stablecoins, which have seen large-scale
redemptions, temporarily losing their peg in the wake of the shock. Redemptions were more
pronounced among stablecoins whose issuers did not disclose the composition of reserve assets
in detail, presumably reflecting investors' worries that such issuers might not be able to guarantee
conversion at par.
Indeed, commentators have warned for some time that there is an inherent conflict of
interest in stablecoins, with an incentive for issuers to invest in riskier assets. Economic history
is littered with attempts at private money that failed, leading to losses for investors and the real
economy. The robustness of stablecoin stabilisation mechanisms depends crucially on the quality
and transparency of their reserve assets, which are often woefully lacking.8
Yet even if stablecoins were to remain stable to some extent, they lack the qualities
necessary to underpin the future monetary system. They must import their credibility from
sovereign fiat currencies, but they benefit neither from the regulatory requirements and
protections of bank deposits and e-money, nor from the central bank as a lender of last resort. In
addition, they tie up liquidity and can fragment the monetary system, thus undermining the
singleness of the currency.9 As stablecoins are barely used to pay for real-world goods and
services, but underpin the largely self-referential DeFi ecosystem, some have questioned whether
stablecoins should be banned.10 As will be discussed below, there is more promise in sounder
representations of central bank money and liabilities of regulated issuers.
A key development in the crypto universe is the rise of decentralised finance, or "DeFi".
DeFi offers financial service and products, but with the declared objective of refashioning the
financial system by cutting out the middlemen and thereby lowering costs.6 To this end, DeFi
applications publicly record pseudo-anonymous transactions in cryptocurrencies on
permissionless blockchains. "Decentralised applications" (dApps) featuring smart contracts allow
transactions to be automated. To reach consensus, validators are incentivised through rewards.
While the DeFi ecosystem is evolving rapidly, the main types of financial activity
continue to be those already available in traditional finance, such as lending, trading and
insurance.7 Lending platforms let users lend out their stablecoins with interest to borrowers that
post other cryptocurrencies as collateral. Decentralised exchanges (DEXs) represent
marketplaces where transactions occur directly between cryptocurrency or stablecoin traders,
with prices determined via algorithms. On DeFi insurance platforms, users can insure themselves
against eg the mishandling of private keys, exchange hacks or smart contract failures. As
activities almost exclusively involve exchanging one stablecoin or cryptocurrency for another,
and do not finance productive investments in the real economy, the system is mostly self-
referential.
Stablecoins play a key role in the DeFi ecosystem. These are so-called because they are
usually pegged to a numeraire, such as the US dollar, but can also target the price of other
currencies or assets (eg gold). In this sense, they often import the credibility provided by the unit
of account issued by the central bank. Their main use case is to overcome the high price
volatility and low liquidity of unbacked cryptocurrencies, like Bitcoin. Their use also avoids
frequent conversion between cryptocurrencies and bank deposits in sovereign currency, which is
usually associated with significant fees. Because stablecoins are used to support a wide range of
DeFi activities, turnover in stablecoins generally dwarfs that of other cryptocurrencies.
The two main types of stablecoin are asset-backed and algorithmic. Asset-backed
stablecoins, such as Tether, USD Coin and Binance USD, are typically managed by a centralised
intermediary who invests the underlying collateral and coordinates the coins' redemption and
creation. Assets can be held in government bonds, short-term corporate debt or bank deposits, or
in other cryptocurrencies. In contrast, algorithmic stablecoins, such as TerraUSD before its
implosion, rely on complex algorithms that automatically rebalance supply to maintain their
value relative to the target currency or asset. To avoid reliance on fiat currency, they often do so
by providing users with an arbitrage opportunity relative to another cryptocurrency.
Despite their name, stablecoins – in particular, algorithmic ones – are less stable than their
issuers claim. In May 2022, TerraUSD entered a death spiral, as its value dropped from $1 to just
a few cents over the course of a few days. In the aftermath, other algorithmic stablecoins came
under pressure. But so did some asset-backed stablecoins, which have seen large-scale
redemptions, temporarily losing their peg in the wake of the shock. Redemptions were more
pronounced among stablecoins whose issuers did not disclose the composition of reserve assets
in detail, presumably reflecting investors' worries that such issuers might not be able to guarantee
conversion at par.
Indeed, commentators have warned for some time that there is an inherent conflict of
interest in stablecoins, with an incentive for issuers to invest in riskier assets. Economic history
is littered with attempts at private money that failed, leading to losses for investors and the real
economy. The robustness of stablecoin stabilisation mechanisms depends crucially on the quality
and transparency of their reserve assets, which are often woefully lacking.8
Yet even if stablecoins were to remain stable to some extent, they lack the qualities
necessary to underpin the future monetary system. They must import their credibility from
sovereign fiat currencies, but they benefit neither from the regulatory requirements and
protections of bank deposits and e-money, nor from the central bank as a lender of last resort. In
addition, they tie up liquidity and can fragment the monetary system, thus undermining the
singleness of the currency.9 As stablecoins are barely used to pay for real-world goods and
services, but underpin the largely self-referential DeFi ecosystem, some have questioned whether
stablecoins should be banned.10 As will be discussed below, there is more promise in sounder
representations of central bank money and liabilities of regulated issuers.
A key development in the crypto universe is the rise of decentralised finance, or "DeFi".
DeFi offers financial service and products, but with the declared objective of refashioning the
financial system by cutting out the middlemen and thereby lowering costs.6 To this end, DeFi
applications publicly record pseudo-anonymous transactions in cryptocurrencies on
permissionless blockchains. "Decentralised applications" (dApps) featuring smart contracts allow
transactions to be automated. To reach consensus, validators are incentivised through rewards.
While the DeFi ecosystem is evolving rapidly, the main types of financial activity
continue to be those already available in traditional finance, such as lending, trading and
insurance.7 Lending platforms let users lend out their stablecoins with interest to borrowers that
post other cryptocurrencies as collateral. Decentralised exchanges (DEXs) represent
marketplaces where transactions occur directly between cryptocurrency or stablecoin traders,
with prices determined via algorithms. On DeFi insurance platforms, users can insure themselves
against eg the mishandling of private keys, exchange hacks or smart contract failures. As
activities almost exclusively involve exchanging one stablecoin or cryptocurrency for another,
and do not finance productive investments in the real economy, the system is mostly self-
referential.
Stablecoins play a key role in the DeFi ecosystem. These are so-called because they are
usually pegged to a numeraire, such as the US dollar, but can also target the price of other
currencies or assets (eg gold). In this sense, they often import the credibility provided by the unit
of account issued by the central bank. Their main use case is to overcome the high price
volatility and low liquidity of unbacked cryptocurrencies, like Bitcoin. Their use also avoids
frequent conversion between cryptocurrencies and bank deposits in sovereign currency, which is
usually associated with significant fees. Because stablecoins are used to support a wide range of
DeFi activities, turnover in stablecoins generally dwarfs that of other cryptocurrencies.
The two main types of stablecoin are asset-backed and algorithmic. Asset-backed
stablecoins, such as Tether, USD Coin and Binance USD, are typically managed by a centralised
intermediary who invests the underlying collateral and coordinates the coins' redemption and
creation. Assets can be held in government bonds, short-term corporate debt or bank deposits, or
in other cryptocurrencies. In contrast, algorithmic stablecoins, such as TerraUSD before its
implosion, rely on complex algorithms that automatically rebalance supply to maintain their
value relative to the target currency or asset. To avoid reliance on fiat currency, they often do so
by providing users with an arbitrage opportunity relative to another cryptocurrency.
Despite their name, stablecoins – in particular, algorithmic ones – are less stable than their
issuers claim. In May 2022, TerraUSD entered a death spiral, as its value dropped from $1 to just
a few cents over the course of a few days. In the aftermath, other algorithmic stablecoins came
under pressure. But so did some asset-backed stablecoins, which have seen large-scale
redemptions, temporarily losing their peg in the wake of the shock. Redemptions were more
pronounced among stablecoins whose issuers did not disclose the composition of reserve assets
in detail, presumably reflecting investors' worries that such issuers might not be able to guarantee
conversion at par.
Indeed, commentators have warned for some time that there is an inherent conflict of
interest in stablecoins, with an incentive for issuers to invest in riskier assets. Economic history
is littered with attempts at private money that failed, leading to losses for investors and the real
economy. The robustness of stablecoin stabilisation mechanisms depends crucially on the quality
and transparency of their reserve assets, which are often woefully lacking.8
Yet even if stablecoins were to remain stable to some extent, they lack the qualities
necessary to underpin the future monetary system. They must import their credibility from
sovereign fiat currencies, but they benefit neither from the regulatory requirements and
protections of bank deposits and e-money, nor from the central bank as a lender of last resort. In
addition, they tie up liquidity and can fragment the monetary system, thus undermining the
singleness of the currency.9 As stablecoins are barely used to pay for real-world goods and
services, but underpin the largely self-referential DeFi ecosystem, some have questioned whether
stablecoins should be banned.10 As will be discussed below, there is more promise in sounder
representations of central bank money and liabilities of regulated issuers.
A key development in the crypto universe is the rise of decentralised finance, or "DeFi".
DeFi offers financial service and products, but with the declared objective of refashioning the
financial system by cutting out the middlemen and thereby lowering costs.6 To this end, DeFi
applications publicly record pseudo-anonymous transactions in cryptocurrencies on
permissionless blockchains. "Decentralised applications" (dApps) featuring smart contracts allow
transactions to be automated. To reach consensus, validators are incentivised through rewards.
While the DeFi ecosystem is evolving rapidly, the main types of financial activity
continue to be those already available in traditional finance, such as lending, trading and
insurance.7 Lending platforms let users lend out their stablecoins with interest to borrowers that
post other cryptocurrencies as collateral. Decentralised exchanges (DEXs) represent
marketplaces where transactions occur directly between cryptocurrency or stablecoin traders,
with prices determined via algorithms. On DeFi insurance platforms, users can insure themselves
against eg the mishandling of private keys, exchange hacks or smart contract failures. As
activities almost exclusively involve exchanging one stablecoin or cryptocurrency for another,
and do not finance productive investments in the real economy, the system is mostly self-
referential.
Stablecoins play a key role in the DeFi ecosystem. These are so-called because they are
usually pegged to a numeraire, such as the US dollar, but can also target the price of other
currencies or assets (eg gold). In this sense, they often import the credibility provided by the unit
of account issued by the central bank. Their main use case is to overcome the high price
volatility and low liquidity of unbacked cryptocurrencies, like Bitcoin. Their use also avoids
frequent conversion between cryptocurrencies and bank deposits in sovereign currency, which is
usually associated with significant fees. Because stablecoins are used to support a wide range of
DeFi activities, turnover in stablecoins generally dwarfs that of other cryptocurrencies.
The two main types of stablecoin are asset-backed and algorithmic. Asset-backed
stablecoins, such as Tether, USD Coin and Binance USD, are typically managed by a centralised
intermediary who invests the underlying collateral and coordinates the coins' redemption and
creation. Assets can be held in government bonds, short-term corporate debt or bank deposits, or
in other cryptocurrencies. In contrast, algorithmic stablecoins, such as TerraUSD before its
implosion, rely on complex algorithms that automatically rebalance supply to maintain their
value relative to the target currency or asset. To avoid reliance on fiat currency, they often do so
by providing users with an arbitrage opportunity relative to another cryptocurrency.
Despite their name, stablecoins – in particular, algorithmic ones – are less stable than their
issuers claim. In May 2022, TerraUSD entered a death spiral, as its value dropped from $1 to just
a few cents over the course of a few days. In the aftermath, other algorithmic stablecoins came
under pressure. But so did some asset-backed stablecoins, which have seen large-scale
redemptions, temporarily losing their peg in the wake of the shock. Redemptions were more
pronounced among stablecoins whose issuers did not disclose the composition of reserve assets
in detail, presumably reflecting investors' worries that such issuers might not be able to guarantee
conversion at par.
Indeed, commentators have warned for some time that there is an inherent conflict of
interest in stablecoins, with an incentive for issuers to invest in riskier assets. Economic history
is littered with attempts at private money that failed, leading to losses for investors and the real
economy. The robustness of stablecoin stabilisation mechanisms depends crucially on the quality
and transparency of their reserve assets, which are often woefully lacking.8
Yet even if stablecoins were to remain stable to some extent, they lack the qualities
necessary to underpin the future monetary system. They must import their credibility from
sovereign fiat currencies, but they benefit neither from the regulatory requirements and
protections of bank deposits and e-money, nor from the central bank as a lender of last resort. In
addition, they tie up liquidity and can fragment the monetary system, thus undermining the
singleness of the currency.9 As stablecoins are barely used to pay for real-world goods and
services, but underpin the largely self-referential DeFi ecosystem, some have questioned whether
stablecoins should be banned.10 As will be discussed below, there is more promise in sounder
representations of central bank money and liabilities of regulated issuers.
A key development in the crypto universe is the rise of decentralised finance, or "DeFi".
DeFi offers financial service and products, but with the declared objective of refashioning the
financial system by cutting out the middlemen and thereby lowering costs.6 To this end, DeFi
applications publicly record pseudo-anonymous transactions in cryptocurrencies on
permissionless blockchains. "Decentralised applications" (dApps) featuring smart contracts allow
transactions to be automated. To reach consensus, validators are incentivised through rewards.
While the DeFi ecosystem is evolving rapidly, the main types of financial activity
continue to be those already available in traditional finance, such as lending, trading and
insurance.7 Lending platforms let users lend out their stablecoins with interest to borrowers that
post other cryptocurrencies as collateral. Decentralised exchanges (DEXs) represent
marketplaces where transactions occur directly between cryptocurrency or stablecoin traders,
with prices determined via algorithms. On DeFi insurance platforms, users can insure themselves
against eg the mishandling of private keys, exchange hacks or smart contract failures. As
activities almost exclusively involve exchanging one stablecoin or cryptocurrency for another,
and do not finance productive investments in the real economy, the system is mostly self-
referential.
Stablecoins play a key role in the DeFi ecosystem. These are so-called because they are
usually pegged to a numeraire, such as the US dollar, but can also target the price of other
currencies or assets (eg gold). In this sense, they often import the credibility provided by the unit
of account issued by the central bank. Their main use case is to overcome the high price
volatility and low liquidity of unbacked cryptocurrencies, like Bitcoin. Their use also avoids
frequent conversion between cryptocurrencies and bank deposits in sovereign currency, which is
usually associated with significant fees. Because stablecoins are used to support a wide range of
DeFi activities, turnover in stablecoins generally dwarfs that of other cryptocurrencies.
The two main types of stablecoin are asset-backed and algorithmic. Asset-backed
stablecoins, such as Tether, USD Coin and Binance USD, are typically managed by a centralised
intermediary who invests the underlying collateral and coordinates the coins' redemption and
creation. Assets can be held in government bonds, short-term corporate debt or bank deposits, or
in other cryptocurrencies. In contrast, algorithmic stablecoins, such as TerraUSD before its
implosion, rely on complex algorithms that automatically rebalance supply to maintain their
value relative to the target currency or asset. To avoid reliance on fiat currency, they often do so
by providing users with an arbitrage opportunity relative to another cryptocurrency.
Despite their name, stablecoins – in particular, algorithmic ones – are less stable than their
issuers claim. In May 2022, TerraUSD entered a death spiral, as its value dropped from $1 to just
a few cents over the course of a few days. In the aftermath, other algorithmic stablecoins came
under pressure. But so did some asset-backed stablecoins, which have seen large-scale
redemptions, temporarily losing their peg in the wake of the shock. Redemptions were more
pronounced among stablecoins whose issuers did not disclose the composition of reserve assets
in detail, presumably reflecting investors' worries that such issuers might not be able to guarantee
conversion at par.
Indeed, commentators have warned for some time that there is an inherent conflict of
interest in stablecoins, with an incentive for issuers to invest in riskier assets. Economic history
is littered with attempts at private money that failed, leading to losses for investors and the real
economy. The robustness of stablecoin stabilisation mechanisms depends crucially on the quality
and transparency of their reserve assets, which are often woefully lacking.8
Yet even if stablecoins were to remain stable to some extent, they lack the qualities
necessary to underpin the future monetary system. They must import their credibility from
sovereign fiat currencies, but they benefit neither from the regulatory requirements and
protections of bank deposits and e-money, nor from the central bank as a lender of last resort. In
addition, they tie up liquidity and can fragment the monetary system, thus undermining the
singleness of the currency.9 As stablecoins are barely used to pay for real-world goods and
services, but underpin the largely self-referential DeFi ecosystem, some have questioned whether
stablecoins should be banned.10 As will be discussed below, there is more promise in sounder
representations of central bank money and liabilities of regulated issuers.
