stable currency

Original translation: Block unicorn

stable currency, which we define as digital assets used as a medium of exchange, purportedly backed by assets held specifically for that purpose, has grown substantially over the past two years. Their market capitalization rose from $5.7 billion on December 1, 2019 to $155.6 billion on January 21, 2022. Additionally, once dominated by a single stablecoin, Tether (USDT), there are now five stablecoins with valuations in excess of $10 billion (as of January 21, 2022; data on stablecoin supply can be found at THE BLOCK). Analyst focus on stablecoin market starts to grow, presidentFinancial Markets Working Group（PWG）release reportfirst level title

Currency and Exchange Mechanisms

As noted in this Liberty Street Economics article, Bitcoin Is Not a New Type of Money, it is useful to distinguish between "money" (the asset being exchanged) and "exchange mechanism" (i.e. the method or process by which the asset is transferred). A key innovation of cryptocurrencies is that theydistributed ledger technology(DLT) platform, which is a new type of exchange mechanism. In this article, we use the term "DLT platform" to refer to payment systems involving such exchange mechanisms.

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The best currency on the best exchange mechanism

Whether DLT platforms will dominate existing transaction mechanisms is open to debate. DLT platforms can improve existing trading mechanisms, for example, if they facilitate the use of new innovations such as smart contracts, or create new types of financial intermediaries such as automated market makers (AMMs). However, important limitations including scalability may limit the usefulness of DLT platforms.

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2. Stablecoins that do not restrict liquidity are more risky and less substitutable.

As Michael Held, Gary B. Gorton, Jeffery Zhang have argued, stablecoins are similar to private bank notes historically, especially those issued during the era of free banking in the United States. Without the regulatory framework and safeguards in place to back bank deposits, these types of private money face various problems, not least because of the uncertain and varying quality of the issuers and the assets backing them. As such, private bank notes are not fungible, and individuals who handle them need to consider whether to accept a particular note at any denomination. Given that similar economic mechanisms are the basis for both private bank notes and stablecoins, history suggests that stablecoins may suffer from similar problems as private bank notes in the era of free banking.

Michael Held is General Counsel and Executive Vice President of the Legal Department at the Federal Reserve Bank of New York. He oversees the day-to-day operations of the group, including legal, bank applications, compliance, the Office of the Corporate Secretary, Federal Reserve Enforcement and records management. He is also a member of the Bank's Executive Committee. In addition, he served as Deputy General Counsel to the Federal Open Market Committee.

Jeffery Zhang is the Board of Governors of the Federal Reserve System.

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3. We already have an efficient form of digital currency; we just need to adapt it to the new environment.

Actions taken by central banks over the last century have resulted in well-functioning banking and payment systems. Why not take advantage of this and issue tokenized deposits? While some practical details need to be worked out, the rationale behind tokenized deposits is simple. Bank depositors will be able to convert their deposits into digital assets (tokenized deposits), which can be circulated on DLT platforms. These tokenized deposits will represent a claim on the depositor’s commercial bank, just like regular deposits.

Recent analysis has highlighted the benefits of maintaining the centrality of banks in the payment system, as noted in the G7 report (G7 report link: https://www.bis.org/cpmi/publ/d187.pdf), “Stable One way to stabilize the value of coins is to leverage the financial strength and stability of the issuing institution,” the PWG (Presidential Working Group on Financial Markets) report on stablecoins recommends that they should be issued by insured depository institutions.

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third, bank deposits have many other attractive features. They are issued by regulated institutions and are protected by deposit insurance (up to $250,000), which makes them very safe. In addition, banks help comply with policies designed to reduce the risk of criminal activities such as money laundering.

Summarize

Summarize

The advent of distributed ledger technology has led to a proliferation of new types of money, such as stablecoins and other types of financial instruments such as decentralized finance. In this article, we argue that if DLT platforms are the transfer mechanism of the future, then find the The best funds for this transfer mechanism seem to be worth it, and we suggest that tokenized deposits could be a fruitful avenue to pursue.