The ECB has given stablecoins a place in its Financial Stability Review. In a report containing the term stability assessment, you would expect the focus to be mainly on risks, but even then the ECB’s approach is striking. The unapologetic desire to favor the traditional banking sector is more than telling.
In Stablecoins on the rise: still small in the euro area, but spillover risks loom, the authors first highlight the obvious concentration in the stablecoin market. In a market estimated by analysts at 280 billion dollar, two coins dominate: Tether (USDT) with 184 billion dollar and USD Coin (USDC) with 75 billion dollar. Together, they account for 90 percent of the stablecoin market. For illustration: if USDT and USDC were regular publicly listed stocks—which they obviously are not—they would rank 89 and 285 respectively on the list of the world’s largest companies by market capitalization.
This strong concentration appears several times as a risk factor, which is of course not entirely illogical. What is remarkable, however, is that the financial sector itself is extremely concentrated. That makes life easier for regulators, though entirely at the expense of the users of the financial system. For example: savings rates of 1 percent while market rates are at least twice as high. And for a mortgage rate, you may have to pay three or four times as much. What a fantastic business model.
In the Netherlands, three well-known major banks hold an estimated 75 percent of the market, depending somewhat on how you measure. In Spain, the three largest banks control 66 percent of the market, in France just under 60 percent, and in Switzerland, UBS alone represents more than 50 percent of the enormous Swiss banking sector after the collapse of Credit Suisse (because traditional banks do fail from time to time).
I have not looked it up, but it does not seem exaggerated to say that the risks at these financial institutions do not involve hundreds of billions, but hundreds of trillions, if not more.
Trust issues
Where concentration risk is a legitimate point—as long as you do not forget that it is exactly the same elsewhere—the analysis becomes more subjective afterward. The analysts conclude that stablecoins are backed by fiat-related assets. These are typically (American) government bonds. If trust in a stablecoin suddenly collapses, this could lead to a fire sale of those fiat bonds, the ECB researchers argue.
You cannot really dispute that, but it mainly raises the question of what underpins trust in those fiat-related assets themselves. What backs them again? Exactly: trust, and nothing else. And as we have seen over the past few years, that trust is under heavy pressure. You cannot keep printing money indefinitely, pushing interest rates down, and running far too high inflation for years without inviting difficult questions about trust.
Stablecoins should actually turn the question around. What are the risks for us of the eroding trust in fiat-related assets, and what does that mean for trust in our stablecoin? Does that sound strange? USDT has already filled a significant part of its reserves with gold.
Financial repression
But what I keep coming back to most is the ease with which the ECB admits that banks need (even more) protection. The report mainly sees risks if households decide to hold part of their bank deposits—in the Netherlands that well-known 600 billion euro—in stablecoins.
That is clearly not the intention. The ECB analysts also point out that under MiCAR, the EU’s regulatory framework for crypto and thus stablecoins, issuers of stablecoins are not allowed to pay interest. Because that would strengthen the outflow of bank deposits and lead to banking disintermediation.
It is stated literally: banks must be massively protected through assigned competitive advantages to ensure that all bank deposits remain locked up in a sector where only a few players dominate. Why? Simple: in the traditional financial system, it is the banks that have to buy all those (American) government bonds.
But even the shameless argument that banks should receive preferential treatment to prevent households from doing what they want with their own money is not enough. The ECB analysts also note that even if some of the money flowing into stablecoins ultimately returns to banks in the form of wholesale deposits, this still increases the shock sensitivity of bank funding structures.
The elephant in the room, of course, is whether stablecoins are truly the problem or the fragile traditional banking sector that relies on unfair competitive advantages. Asking the question is answering it. Why are households not allowed to move their bank deposits to earn more interest? With barely 1 percent interest and 3 percent inflation, such behavior is nothing but a natural reaction. The only thing different from the past is that central bankers no longer bother to hide this mechanism of financial repression. It is no surprise that trust is visibly deteriorating.
Source: ecb.europa.eu
Jeroen Blokland analyzes striking, timely charts on the financial markets and macroeconomy. He also manages the Blokland Smart Multi-Asset Fund, a fund that invests in equities, gold, and bitcoin.