Stablecoins have garnered significant industry attention in recent years, but an official at the Bank for International Settlements has raised concerns about the digital assets’ viability in the global economy.
In comments at the Jackson Hole Economic Symposium, BIS General Manager Pablo Hernández de Cos underscored the issues with stablecoins, including concerns about redeemability, interoperability, and financial integrity. Stablecoins are also highly skewed toward the U.S. dollar, which raises concerns about payments sovereignty.
Alternatively, the BIS GM touted the advantages of tokenized deposits, which deliver the benefits of blockchain within the established financial services paradigm.
“Stablecoins and tokenized deposits may look similar on the surface, but they represent very different models of money,” said Joel Hugentobler, Cryptocurrency Analyst at Javelin Strategy & Research. “Tokenized deposits keep funding and customer relationships inside the banking system, while stablecoins offer greater interoperability outside it. At scale, the real winner may be determined less by technology and more by which model better fits the use case.”
A Fragmented Environment
Though not discussed as frequently as stablecoins, the use cases for tokenized deposits are many. Like stablecoins, they offer low-cost, speedy, and transparent settlement of funds. However, they differ in that stablecoins are issued and backed by private companies, while tokenized deposits represent the deposits held within a regulated financial institution.
This difference is one of the key downsides to stablecoins, Hernández de Cos argued, as their public blockchain underpinning is not regulated like banking infrastructure—an issue that could open opportunities for misuse by bad actors.
The BIS official also stated that the many types of stablecoins have created a fragmented environment. For example, if a user holds USDT and the merchant accepts only USDC, the stablecoins must be converted—which can also lead to fees or secondary transactions where the stablecoins aren’t traded at par to their underlying currency.
An Ardent Supporter
BIS—which is a consortium of global central banks—has been an ardent supporter of tokenized deposits for years and has spearheaded initiatives like Project Agorá. The project was designed to explore whether tokenized deposits can improve cross-border payments within the existing financial system.
Separately, many of the leading U.S. banks have also invested in tokenized deposits. For example, a group led by JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo plan to launch a tokenized deposit network next year via The Clearing House.
As other platforms are also emerging, there is also growing fragmentation in tokenized deposits. Hernández de Cos acknowledged this gap, but still argued that keeping deposits within the existing financial framework is the best policy for most global payments, while stablecoins should instead serve niche functions.
Though there may be merit to this argument, the rapid saturation of stablecoins and their increasing entrenchment in consumer behavior could present a challenge to the broader adoption of tokenized deposits.