19 February 2022
Stable coins are a platform play to intermediate between conventional and alternative payment systems. The recent announcement by PayPal to consider issuing a stable coin seems to affirm that there is an increasing desire by incumbents to respond to demands for alternative settlement mediums. Stable coins normally convert national currencies into new currency mediums to serve as native payment instruments on DLT-based financial market infrastructures. There are currently no high-quality stable coins and while there are several stable coins denominated in U.S. dollar, no major stable coin exists in other currency denominations. In France, the provisions of the Ordonnance Blockchain seems to offer a favourable regulatory framework to issue stable coins as money market fund units. France also exhibits the highest incidence of money market funds in the Euro Area and hence familiarity with such investments. Stable coins issued as money market fund units would allow to offer a high-quality fully regulated settlement medium for inter-bank clearing and large value financial transactions and could become the missing link in the hierarchy of monies.
Stable coins normally give rise to a claim to a promise of convertibility into a national currency. To uphold credibility that convertibility can be maintained, stable coins typically hold assets, akin to a backing portfolio, against issued coins. Stable coins normally do not constitute a claim on the issuer or on the underlying backing portfolio.1
The principles underlying stable coins are similar to a fixed exchange rate regime. Under a fixed exchange rate, a central bank commits to maintain the national currency at a fixed exchange rate relative to a foreign anchor currency typically the U.S. dollar. Fixed exchange rates thus allow the central bank to tie the national currency to the stability of a foreign currency and are typically chosen where the central bank may not attract sufficient credibility to ensure stability on its own or where economic linkages do not justify an independent monetary policy from the dominant foreign currency. Currency boards are the strictest example of fixed exchange rate regimes. A central bank normally maintains foreign exchange reserves to support and signal its commitment to maintain the fixed exchange rate parity.
Money market funds are collective investment schemes with the goal of maintaining a highly stable asset value. The shares or units of a money market fund are typically treated as “cash equivalent” and form part of the broadest monetary aggregates (M3).2 Money market funds constitute tightly regulated entities with a narrow focus to preserve capital and provide liquidity through maintaining investments only in near-term and highest quality assets. Public debt Constant Net Asset Value (CNAV) funds must invest 99.5 percent in government assets. Units in the fund are purchased or redeemed at a constant price rounded to the nearest percentage point. Money market funds typically obtain the highest credit rating (Aaa-mf (Moody's) or equivalent). There are EUR686 billion of money market fund shares outstanding in the Euro Area of which EUR381 billion in France.3
Stable coins may already benefit from existing financial regulation. In France, under the Ordonnance Blockchain in principle the issuance of the shares of a non-listed mutual fund–type structure (OPCVM) on a DLT-platform is possible. OPCVMs normally are opened-ended investment vehicles authorised under the E.U. UCITS Directive and managed by UCITS Management Companies (investment managed company in France authorised by the AMF). Under E.U. regulation, OPCVMs issued in France could also in principle be offered in other E.U.-member countries.
Stable coins could be issued like money market fund units denominated in the national or other currencies. The stable coin's assets would be managed in line with the provisions of a money market fund and the fund's units could be issued on a DLT-platform to serve as settlement medium on DLT-enabled financial market infrastructures. Stable coins issuers would have to be UCITS Management Companies.
Stable coins as money market fund units may constitute the missing link in the hierarchy of monies. If established as money market funds and regulated as UCITs, they would offer the highest quality monies in a given currency areas short of central bank money and superior to claims on banks. Transactions in commercial bank money may be susceptible to migrate to a high-quality stable coin and stable coins could emerge as the preferred settlement medium where central bank money is not available.
1 Stable coins are conversions of monetary aggregates. The location of the backing portfolio may matter of whether or not the underlying assets have an expansionary monetary impact.
2 M3 is the sum of M2, repurchase agreements, money market fund shares/units and debt securities with a maturity of up to two years (ECB).