The rise of stablecoins risks eroding the role of central banks in governing their nation’s monetary policy, European Central Bank president Christine Lagarde said.
Stablecoins, which are digital assets usually pegged to fiat currencies, have grown in popularity. Their rise as relatively stable assets in the world of cryptocurrency have made them appealing both to investors and issuers. As a result, central banks across the world have been forced to contend with how to regulate stablecoins.
On Tuesday during a gathering of central bankers in Sintra, Portugal, Lagarde said stablecoins shouldn’t be treated as money.
“I think that we are falling prey to some confusion between money, means of payment, and payment infrastructure, and that is accelerated or emphasized as a result of the technology that is being used, and some technologies in particular,” Lagarde said during a panel with four other central bankers.
One of the questions regulators and central banks contend with when it comes to stablecoins is that they are often issued by private companies, not the public sector. Among the most well-known stablecoin issuers are companies like Circle and Tether, which have tokens linked to the U.S. dollar, the euro, and the Chinese yuan.
“I regard money as a public good, and ourselves as the public servants in charge of securing and protecting that public good,” Lagarde said. “My fear is that that blurring of the lines I mentioned earlier is likely to lead to a privatization of money. I don’t think that this is the purpose for which we’ve been appointed to do the job that we have, nor is it good for this public good that is money.”
One of the major risks central banks see in stablecoins is that if enough investors use them it will reduce the amount of money in traditional banks, therefore limiting the effectiveness of monetary policy on the economy.
“I think it risks undermining our capacity to conduct monetary policy,” Lagarde said. “I think it risks weakening the sovereignty of those countries, which inadvertently become subject to the use of that means of payment, payment infrastructure, slash alleged money.”
Bank of England governor Andrew Bailey said stablecoins “purport to be money” which makes them different from other digital assets like Bitcoin. It also means they should be subject to more stringent regulations, he said.
“They purport to have the medium of exchange function of money, and therefore they do have to meet the test of money…which is really all about them being assured to hold their nominal value,” Bailey said.
Stablecoin regulations across the globe
To contend with stablecoins central banks have been working with lawmakers to draft new legislation for the assets.
In the U.S. the Senate passed the GENIUS Act last month, which provided the first regulatory framework for stablecoins. The law was considered a watershed moment for the crypto industry, as it essentially paved the way for government-sanctioned, privately issued digital currencies pegged to the U.S. dollar. In South Korea investors had flocked to dollar-backed stablecoins to such a degree that the Bank of Korea had to loosen regulations on foreign exchange markets to attract investors to the country as capital fled elsewhere. Meanwhile Lagarde has pushed the European Parliament to move faster on introducing laws overseeing a digital euro, which would help counter the influence of stablecoins.
Other central bankers on the panel with Lagarde welcomed the push to regulate stablecoins.
Bank of Korea governor Rhee Chang-yong said without proper oversight stablecoins could undermine South Korea’s regulations governing capital flows.
Federal Reserve chair Jerome Powell said regulations were needed since stablecoins were becoming a fixture in the financial world. “If we’re going to have stablecoins—and apparently we are—we need to have a federal and state level regulatory framework, which I think we’re making progress towards having,” he said.
