Stablecoins present threat to monetary sovereignty – WEF panel

Maintaining sovereignty will be one of the biggest challenges central banks face as they enter a new era of digital money, according to panellists at the World Economic Forum. 

Global stablecoins have the potential to challenge monetary sovereignty and change the way monetary policy works, said Valdis Dombrovskis, executive vice-president at the European Commission. “But I do not think we are at this stage yet”.

Dombrovskis was joined by policy-makers and private-sector innovators on the panel to discuss the possible design of a credible and trusted digital currency.

“Preserving sovereignty will be the hardest challenge,” said Tharman Shanmugaratnam, chairman of the Monetary Authority of Singapore. “Even with central bank digital currencies (CBDCs), the sovereignty of other countries will be at risk.”

Recently, the debate about monetary sovereignty with regard to crypto assets has grown louder, thanks to the emergence of stablecoins – digital currencies that are pegged to certain underlying assets. Global stablecoins, such as libra, could have a significant impact on monetary sovereignty through currency substitution, policy-makers have warned.

While usage of these instruments remains low, banks have nothing to worry about, the majority of the panellists agreed. But the threat of private sector competitors in their space for the first time has spurred regulators into looking at current frameworks to see where efficiency gains can be made.  

“It is important to look at why people are using these assets,” Dombrovskis said, noting very few consumers use digital currencies as a store of value. Instead they are being used for payments, an area where speed and efficiency have become the deciding factor.

“If banks and regulators do not address consumer demands themselves, someone else will fill the gap,” he said.

David Marcus, head of Facebook’s digital money initiative Calibra, agreed that such initiatives – including his own company’s – were born out of a need to solve a problem.

“There are so many people that are trapped in the cash economy today that if they have a window into the world’s economy and the ability to digitise their money and have more opportunity, it changes their lives,” he said.

The development of CBDCs is, therefore, crucial, according to Neha Narula, director of the Digital Currency Initiative at MIT. Central banks, she said, have the responsibility to provide access to central bank money, whether that be in a digital format or in the form of banknotes. “If CBDCs happen, it will be a better choice [for consumers],” she said.

Benoît Coeuré, director of the Bank for International Settlements’ new innovation hub, agreed central banks could not rest on their laurels and watch the private sector dictate the future payments landscape, though he admitted the private sector was often where innovation occurred.

“The more you move towards the core of the global payment system, the more likely you are to see central bank money because that is what provides stability,” he said. “We care about financial stability and we have built a system which works very well … it has never failed.”

However, he noted there was room for private sector players to innovate at the customer-facing end of global payments.

Not all panellists agreed with Coeuré that the public sector should continue to control the global payment system. While some public policy and financial regulation would be needed, Shanmugaratnam argued you would “not necessarily see” the public sector running the global payment system in the future.

New toolkit

On the back of the discussions, the World Economic Forum has issued a ‘policy-maker toolkit’ to provide advice to central banks looking to create their own central bank digital currencies.

The report contrasts several different types of CBDC, including retail, for use by members of the public; wholesale, which can be issued to commercial banks for interbank payments; and cross-border, which can be used by any party for borderless payments.

The report claims that CBDCs could offer significant improvements to the efficiency and speed of cross-border interbank payments and reduce settlement times.

“CBDC has risen to prominence … because of its potential to address both long‑standing and new challenges, such as financial inclusion and payment‑system stability,” the report says.