Stablecoins could provide market participants with a profitable means to balance their capital in the wild world markets. In the past year, three major financial oversight bodies have expressed concern about threats to financial stability that stablecoins are allegedly posing.
Although the possibilities of increasing the efficiency of payments are recognized. According to reports from the Bank for International Settlements, the United States Federal Reserve and, more recently, the Financial Stability Board, numerous risks stand out under the banner of “financial stability.”
The concern is with global stablecoins, which they define as having a “Potential reach and adoption across multiple jurisdictions and the potential to reach substantial volume.” The JEF report included a glossary of definitions of key terms, although none was provided for “financial stability”.
What does financial stability mean?
The simplest way to conceive of financial stability is as an absence of instability. The 2007-2008 global financial crisis marked the epitome of modern financial instability.
It was in response to this crisis that the G-20 leaders established the Financial Stability Board in 2009. Hosted and financed by the BIS, in this way, the global financial system is supervised, coordinating the work of the national financial authorities and others. world bodies.
Its stated objective is “Address vulnerabilities that affect financial systems in the interest of global financial stability.” Preventing another event similar to the 2008 financial crisis is presumably the main purpose of this body.
The 2008 financial crisis
The 2008 financial crisis is best explained as the inevitable result of a prolonged failure in price discovery in the residential mortgage credit markets. Because, by then, the values of subprime mortgages were worthless, according to their analysis, yet they were rated AAA.
Despite being the best positioned to perform credit analysis. Mortgage originators had strong financial incentives to turn a blind eye. Despite having the strongest financial incentives to conduct credit analysis, subprime mortgage investors were in an impossible position to do so.
In this way, the pricing mechanism in this market was totally inhibited by blind and widespread confidence in AAA ratings.
As the demand for high-yield securities on subprime mortgages grew enormously regardless of the creditworthiness of residential borrowers, a painful “rediscovery” of the prices of these assets became inevitable.
The antidote to systemic financial risk is to facilitate and maintain sound pricing mechanisms in broadly owned asset markets. This objective is favored by the presence of sophisticated market participants: those who do not depend on rating agencies to allocate capital.
These entities play a major role in the price discovery mechanism, but their work is not easy. They need a profitable means to quickly move and rebalance their capital on world markets. This is where stablecoins come in.
The benefit of stablecoins
Stablecoins were designed to address inefficiencies within traditional banking and money. This, infusing highly mobile crypto assets with the essential economic properties of fiat money.
Rather than compete with Bitcoin, global stablecoins help facilitate access to this novel asset. It should be noted that if traditional money and banking were not so slow, expensive and exclusive, stablecoins would not exist.
Global stablecoins may be on their way to becoming a widely used asset. Maintained for their usefulness in transactions rather than as an investment, these products have virtually nothing in common with the complex high-risk securities involved in the financial crisis. They represent a claim on assets, including money in a bank.
Business is simple. Unlike many financial intermediaries, global stablecoin issuers do not depend on making risky bets to generate profits. Rather, they earn fees simply for managing their respective tokens. While maintaining and benefiting from the corresponding reserve assets received from the participants in the primary market.
Stablecoins promote financial stability
Global stablecoins provide sophisticated market participants with profitable means to quickly change and achieve capital balance across global markets. This reduction in friction promotes active market participation and healthier pricing mechanisms. They are the best defense against systemic financial risk.
The notion of financial stability of these supervisory bodies includes the profitability and solvency of traditionally established financial institutions.
Since national policy makers are concerned that the widespread adoption of global stablecoins may. “Further reduce the profitability of banks, which could lead banks to take more risks.” But what managers need to recognize is that functioning financial institutions are not synonymous with the overall financial system.
The stability of bank profits cannot be synonymous with global financial stability. For many millions of people worldwide, crypto assets are a welcome addition to the global financial system.
Regardless of the concerns of these oversight bodies. You can see the potential of stablecoins and other crypto assets to improve financial stability and strike a balance in the markets. National policy makers should not overlook this aspect.