MONETARY EFFECTS OF GLOBAL STABLECOINS.

• Author: He, Dong

The globalized economy now moves at the speed of electrons--and the future of money is inexorably going digital, too. New forms of digital money, such as central bank digital currencies (CBDCs) and so-called global stablecoins, are shaping the future of money and payments. CBDCs are a digital form of fiat currency issued by a central bank. Some central banks started exploring CBDCs a few years ago, and those explorations have gathered momentum since Facebook and its partners announced their intention to launch the Libra stablecoin in June 2019. Because the stablecoins issued by large technological companies or platforms (Big Techs) have the potential to be adopted by businesses and households everywhere, they are called "global stablecoins," or GSCs, in shorthand. (1)

These new forms of digital money embody recent breakthroughs in digital technology such as cloud computing; the proliferation of mobile devices; and "distributed ledger technology," which facilitates peer-to-peer payments without relying on bilateral banking relationships. As compared to first-generation cryptoassets, such as bitcoin, stablecoins seek to minimize price fluctuations by pegging their valuation to nations' official fiat currencies or other existing assets. They do so by backing stablecoins' issuance with assets (including assets denominated in widely used official currencies, either individually or as a "basket" of currencies), or by managing their outstanding supply using algorithms. (2)

This article explores stylized scenarios of GSC adoption in order to demonstrate their possible monetary effects. This is not an effort to forecast specific outcomes or to judge their desirability. Using several scenarios as way to envision future possibilities, the analysis aims to shed light on the following questions: What is special about GSCs that could lead to scenarios where they are used extensively? What are the consequences for monetary policy transmission and financial stability? What are the potential policy responses that country authorities could consider, aiming to balance efficiency gains against the potential risks of adopting GSCs?

Adoption and Use Scenarios

The cross-border use of currencies falls into two categories: the use of a currency for international transactions, and the domestic use of a currency issued by a foreign entity'. In the first category, international currencies serve as a medium of exchange, as a store of value, and as a unit of account, and they are used for international trade, international finance, and foreign exchange reserves. In the second category, a foreign currency displaces a domestic currency for domestic transactions, a situation commonly referred to as "currency substitution."

Traditionally, the economic weight of a currency's issuing country--along with its trade links, financial connections, and geopolitical stature, as well as the currency's perceived safety and liquidity--explain why some currencies are used disproportionately in cross-border transactions (Eichengreen, Meld, and Chitu 2018). In addition, strong network effects and synergies across the three functions of money (as a unit of account, a means of payment, and a store of value) act as self-reinforcing mechanisms: once a currency is dominant, it has tended to stay dominant (He and Yu 2016; Gopinath and Stein 2018).

Certain intrinsic attributes of GSCs could also drive their adoption and use in ways that are distinct from the existing dynamics of currency adoption, including the following:

* Lower transaction costs: GSCs have the potential to reduce the costs of cross-border payments by bypassing correspondent banking relationships and potentially simplifying compliance procedures. The programmability of GSCs, including through the use of smart contracts, could help reduce switching costs in foreign exchange markets and reduce transaction costs in securities issuance and trading through the tokenization of assets more broadly.

* Ease of access: Access to a foreign currency can be challenging to establish, especially in rural areas in developing countries. GSCs can broaden access to financial services and promote financial inclusion through mobile devices among those who do not have access to bank accounts. Moreover, particularly if the issuer is a private company, there can be an upfront investment with the specific aim of reaching a broader set of users.

* Access to complementary services or "bundling": Stablecoins specifically can be more than a new form of money: they can provide entry' into a wider platform of services. Big Techs, such as Facebook, could follow a pattern similar to those taken by Alipay and WeChat Pay in China by bundling their existing social media and e-commerce services, respectively, with payment and other financial services through the issuance of a stablecoin.

Legal provisions will heavily influence GSCs' use. Importantly, recipient countries may determine the degree to which the denomination and settlement of contracts in a GSC will be legally authorized. Legal certainty would be necessary for GSCs to operate as a means of payment in cross-border transactions: That would require a degree of uniformity in the legal characterization of GSCs as instruments consistent with a payment function.

Regulatory frameworks also play a crucial role in shaping the scale and scope of GSC use. In countries with exchange restrictions, households and firms could choose to use GSCs because they can help circumvent some of those limits. At the same time, there is significant regulatory uncertainty about the treatment of GSCs, and there are concerns regarding the ability to effectively oversee and supervise the complete ecosystem involved in a cross-border GSC. As a result, there may be significant pushback by regulators against allowing GSCs to operate in their jurisdictions.

As an example of such adoption dynamics, imagine two scenarios of the global adoption of GSCs. These scenarios are not chosen because they are likely or desirable; they are instead designed as stylized examples to help analyze the macrofinancial effects of different degrees of GSC adoption.

In the first scenario, a single GSC becomes commonly adopted in many countries, and it replaces the local currency as store of value, a means of payment, and a unit of...