Settling on Solid Ground: Why Intrasettle Opts for Central Bank Digital Money Over Stablecoins ????
Intrasettle, a leading financial settlements provider, wisely utilizes Central Bank Digital Money for settlements, steering clear of stablecoins. This well-thought-out choice is deeply grounded in economic theories and historical financial data, and centers around the critical concept of the “singleness of money.” The research by Gorton and Zhang (2023) sheds light on the repercussions of employing stablecoins in contrast to tokenized central bank deposits for monetary settlements.
Pillar of Singleness of Money ??
Intrasettle’s preference for Central Bank Digital Money over stablecoins can be attributed to the importance of maintaining the “singleness of money”. A monetary system thrives when there is a single, clear unit of account underpinning all economic transactions. Such a system enables fluid trade and exchange, essential for economic activities. Stablecoins, however, can detach from their peg to the sovereign currency and introduce fluctuations, which undermines the singleness of money (Gorton and Zhang, 2023).
The Shaky Landscape of Stablecoins ??
Stablecoins are essentially private tokenized monies that operate as digital bearer instruments. Interestingly, Gorton and Zhang (2023) liken them to the circulating private money of the 19th century. However, this form of money was deemed inefficient due to not being consistently accepted at par and being prone to bank runs.
Furthermore, stablecoin issuers are akin to unregulated banks ??, with the same inherent issues of circulating private money - it serves as a subpar medium of exchange and is susceptible to destabilizing bank runs. Money has three critical properties: a unit of account, a store of value, and a medium of exchange. A crucial but often overlooked property is the no-questions-asked (NQA) principle, which demands money to be accepted in transactions without any doubt regarding its value. Achieving NQA has been historically challenging, and it is this NQA property that allows money to have a convenience yield. The most economically efficient forms of money maintain a uniform price at par. However, stablecoins can lose their peg, and during economic uncertainty, they can be susceptible to bank runs, impacting their NQA property and potentially affecting the broader economy (Gorton and Zhang, 2023).
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The Solid Foundation of Central Bank Digital Money ????
Contrastingly, Central Bank Digital Money, particularly tokenized deposits, does not circulate as bearer instruments and settles in central bank money. This settlement method is more aligned with preserving the singleness of money since tokenized deposits are liabilities of regulated financial institutions, settled automatically using tokenized central bank money. When a payment is made, it’s credited at face value, maintaining the NQA principle and promoting the singleness of money.
Enhanced Functionality and Security ????
Tokenized deposits through Central Bank Digital Money leverage programmable ledgers, allowing for contingent execution and composability of transactions (Aldasoro et al, 2023). This versatility enables automation and optimization of settlement processes. Additionally, Central Bank Digital Money, being issued and regulated by central banks, ensures higher security and trust compared to stablecoins.
Conclusion ??
Intrasettle’s discerning choice to employ Central Bank Digital Money over stablecoins for settlements is rooted in economic principles and historical insights. By embracing Central Bank Digital Money, Intrasettle guarantees stability, efficacy, and reliability in financial settlements, safeguarding the interests of all participants and maintaining the essential properties of money.