Key facts:
Stablecoins and tokenized deposits bear several similarities.
There are reasons to prefer a tokenized deposit over a stablecoin, according to the NY Fed.
Tokenized deposits are the instrument that, for four researchers from the Federal Reserve Bank of New York, could supplant stablecoins, which, according to them, do not represent the future of payments.
so what they suggested the specialists in a note shared on the website of the branch of the US Central Bank. They say that right now tokenized deposits are a “well-working” payment system.
By definition, a tokenized deposit is what allows banking users convert your holdings in and out of these institutions into digital assets operating on platforms based on distributed accounting technology (DLT). These deposits would represent a claim on the depositor’s commercial bank, just like a regular deposit.
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According to New York Fed researchers, there are three reasons why it’s a good idea to prefer a tokenized deposit over a stablecoin. The first is that commercial banks already have deposits for which they are partially backed by reserves. This avoids blocking liquidity. Thus, by tokenizing them, “bank loans to the real economy and the transmission of monetary policy are supported”.
Second, with these deposits customers can exchange goods or services, through existing payment infrastructures. For example, according to specialists, merchants who receive these funds through payment systems based on deposits would not worry about the origin of that money, but would be transferred at par.
And third, these tokenized deposits have “attractive features” such as being issued by regulated institutions and being protected by insurance up to $250,000. This, they say, “makes them extremely safe.”
The researchers state that tokenized deposits “provide a useful example of a better kind of money that can, and does in limited capacities, circulate on a DLT platform.”
Thus, they argue that, as DLTs have led to the proliferation of new types of money, “it seems worthwhile to find the best possible money that can be used in that transfer mechanism.” For them, “tokenized deposits could be a fruitful avenue to pursue.”
A similar alternative
Researchers at the New York Fed, who prefer tokenized deposits over stablecoins, seem not to take into account that, in practice, both forms of money are very similar. It is based on the fact that they operate on decentralized platforms and that with them you can access goods and services.
However, they recognize the rapid growth that stablecoins have had, which, as of January 21, 2022, had a market capitalization greater than USD 155 billion. This, coupled with the fact that there are already at least five stablecoins whose valuations exceed $1 billion.
But according to the researchers, stablecoins, which are typically pegged at 1:1 to the US dollar, could lead to a shortage of safe and liquid assets. They argue that tying them to a stablecoin deal would mean they are unavailable for other uses, such as helping banks meet their regulatory requirements.
They also compared stablecoins to private bank notes during the era of free banking in the United States, between 1837 and 1862, which were subject to various problems, which made them non-expendable.
Since private banknotes and stablecoins underlie similar economic mechanisms, history suggests that stablecoins could suffer similar problems as private banknotes during the era of free banking.
New York Fed researchers.
Rejection of stablecoins
New York Fed Researchers’ Impression Against Stablecoins reinforces the narrative that exists on the part of traditional banking against this new money.
A few days ago, CriptoNoticias reported the comments of the president of the Bank for International Settlements (BIS), Agustín Carstens, who stated that these currencies are at risk of being centralized and, at the same time, pose a threat to the traditional financial system.
According to the banker, the companies that run stablecoins, such as Tether or Circle, responsible for Tether (USDT) and USD Coin (USDC), respectively, could star in a scenario of “monetary dominance”.
While he didn’t talk about tokenized deposits, he did highlight central bank digital currencies (CBDCs), the virtual fiat money. According to the manager, these do not have to borrow their credibility, because by being issued directly by a central bank, “they inherit the trust that the public already places in their currency.”