Some are convinced that stablecoins are tools that will drive modernization in finance, while others warn against their risks. These are digital currencies whose value is tied to one of the so-called fiat currencies. But what are the pros and cons of stablecoins? What should be considered, and which of the aforementioned perspectives is closer to reality?

We likely will not resolve the final question, as there is no clear answer. However, stablecoins have been in the spotlight in recent weeks, not only in the media. Their recent surge in popularity is partly linked to US President Donald Trump, who signed a law regulating the stablecoin market less than two months ago.

Stablecoins as a solution to inefficiencies

Let us consider the views of two experts who see the role of stablecoins in completely opposite ways. According to the first of them, Eswar Prasad, a professor at Cornell University in New York, stablecoins are almost a blessing for the world of finance. Prasad believes that warnings about stablecoins are misleading, which he says stems from a misunderstanding of their nature.

“What stablecoins are really doing is shining a harsh light on pervasive inefficiencies in modern financial systems and showing how new technologies can fix them by creating efficient, cheap and broadly accessible means of domestic and cross-border payments,” Prasad wrote for the British daily Financial Times. [1]

Stablecoins also highlight a lack of trust in many central banks and their currencies. Prasad believes it is in the interest of governments, regulators, and central bankers to address these shortcomings.

He adds that the Eurozone has already recognized these issues and is working on a digital euro, a central bank digital currency (CBDC). According to Prasad, the private banking sector will also have to respond to the rising popularity of stablecoins and CBDCs by streamlining payment systems and offering alternative products. In the long run, Prasad says, everyone operating in the financial market could benefit.

Concerns over risks to households

Nobel Prize–winning economist Jean Tirole does not share this optimism. He argues that stablecoins could pose significant risks to households holding them, noting especially the reasons why some stablecoins are issued, particularly those tied to the US dollar.

Backing stablecoins with US government bonds could prove problematic due to their relatively low yields. Tirole pointed out that Treasury debt returns were “negative for a number of years,” with inflation further eroding payouts. “Stablecoin issuers could therefore be lured into the temptation to invest in different assets that carry higher returns and are riskier,” he told the Financial Times. [2]

This, in turn, raises the likelihood of a situation where stablecoins lose value as reserve assets, potentially triggering a run on the currency to which they are pegged.

“In such a scenario, the price of stablecoins might go down as they lose their peg to a sovereign currency,” Tirole warned. According to him, such risks could be managed only if global supervisors have sufficient manpower and incentives to exercise extreme caution.

Sources:

[1] https://www.ft.com/content/72aa6431-366b-4409-b3ce-9a99d661473d

[2] https://www.ft.com/content/445e7fb6-1ec8-47f3-b74d-87f7960e85d6