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The Stablecoin Illusion

Summary:
An obscure corner of the digital sphere that was poorly understood two years ago is now subject to increasingly intense scrutiny by central bankers, regulators, and investors. Unfortunately, more intense scrutiny has not necessarily meant better understanding. BERKELEY – The debate over stablecoins has come a long way since Facebook announced the creation of Libra (now rebranded Diem) almost exactly two years ago. An obscure corner of the digital sphere that was poorly understood then is now subject to increasingly intense scrutiny by central bankers, regulators, and investors. The stakes, including for financial stability, are high. Market capitalization, or circulating supply, of the four leading US dollar

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An obscure corner of the digital sphere that was poorly understood two years ago is now subject to increasingly intense scrutiny by central bankers, regulators, and investors. Unfortunately, more intense scrutiny has not necessarily meant better understanding.

BERKELEY – The debate over stablecoins has come a long way since Facebook announced the creation of Libra (now rebranded Diem) almost exactly two years ago. An obscure corner of the digital sphere that was poorly understood then is now subject to increasingly intense scrutiny by central bankers, regulators, and investors. The stakes, including for financial stability, are high. Market capitalization, or circulating supply, of the four leading US dollar stablecoins alone exceeds $100 billion.

But more intense scrutiny does not mean better understanding. Start with the belief that stablecoins are intrinsically stable because they are “fully collateralized.” The question, of course, is: collateralized by what?

Naive investors in dollar-linked coins assume that the collateral takes the form of dollars held in federally...

Barry Eichengreen
Barry Eichengreen is Professor of Economics at the University of California, Berkeley; Pitt Professor of American History and Institutions at the University of Cambridge; and a former senior policy adviser at the International Monetary Fund.

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