Stablecoins and Trust in Financial Systems

Dec 2024

Executive Summary

Some central bank commentary—including the December 2025 keynote by the Reserve Bank of India—argues that stablecoins lack the defining attributes of modern money and pose serious risks to monetary sovereignty and financial stability. While these concerns are legitimate, this paper contends that much of the critique rests on normative definitions rather than analytical necessity.

Stablecoins do not challenge the concept of money itself; they challenge institutional monopolies over money’s issuance, settlement, and programmability. The key policy question is therefore not whether stablecoins are “money”, but whether—and under what constraints—they can coexist within a regulated monetary system without undermining macroeconomic control.

This paper argues that:

• Fiat issuance and sovereign backing are institutional mechanisms of trust, not universal prerequisites for monetary legitimacy.

• Singleness of money is a regulatory outcome, not an inherent feature of sovereign money.

• Properly regulated stablecoins resemble narrow banks or tokenised money-market instruments, not unbacked cryptocurrencies.

• The principal risk to central banks is not stablecoin failure, but selective success in high-utility niches where legacy systems underperform.

The appropriate response is not prohibition, but structured containment and integration within the regulated financial perimeter. This is the approach signalled by the Reserve Bank of Australia and the Department of Treasury in recent years.

1. Money: Definition Versus Explanation

Central bank doctrine typically defines money as:

• Fiat in nature

• Sovereign-backed

• Singular within a jurisdiction

These properties describe how modern monetary systems currently operate, but they do not explain why money works.

Historically, money has functioned under diverse arrangements:

• Commodity standards

• Private bank note issuance

• Credit-based clearing systems

• Hybrid public–private structures

What unifies these systems is not sovereign issuance, but credible settlement, broad acceptability, and enforceability. Sovereign backing has proven to be an effective trust anchor—but it is neither logically necessary nor historically exclusive.

When policy arguments elevate institutional arrangements into axioms, they risk conflating stability of the present system with immutability of monetary form.

2. Trust: Institutional Authority or Systemic Reliability?

Central banks often contrast sovereign trust with what is characterised as the fragility of “trust in code”. This distinction understates how trust already operates in modern financial systems.

In practice, most users:

• Do not audit central bank balance sheets

• Do not evaluate bank risk models

• Do not understand payment settlement mechanics

They trust systems, not entities.

Stablecoins replace discretionary, institution-based trust with procedural trust embedded in technical and legal frameworks. This does not eliminate trust—it redistributes it across:

• Code and protocol design

• Legal enforceability of issuer obligations

• Transparency of reserves and settlement

From a policy perspective, the question is not whether procedural trust is inferior, but how it is governed, supervised, and bounded.

3. Intrinsic Value: A Misleading Criterion

The repeated emphasis on “intrinsic value” obscures more than it clarifies.

• Fiat currency has no intrinsic value

• Its worth derives from acceptability, legal tender status, and tax obligations

• Stablecoins similarly derive value from convertibility, usability, and network adoption

The meaningful distinction is not intrinsic value, but liability structure:

• Who owes what to whom?

• Under what legal regime?

• With what recourse?

On this axis, stablecoins are not comparable to unbacked crypto-assets. They are closer to regulated claims on underlying assets—if, and only if, liability and redemption are legally explicit.

4. Are Stablecoins Money?

By classical standards, most cryptocurrencies fail the tests of money (unit of account, means of exchange, store of value). Stablecoins occupy a different category altogether.

They are best understood as:

• Digitally native private money

• Fully (or near-fully) reserved claims

• Settlement instruments rather than monetary bases

Their policy relevance lies not in redefining money, but in altering settlement architecture:

• 24/7 operation

• Atomic settlement

• Programmability

• Cross-platform interoperability

Central banks should therefore assess stablecoins not as rival currencies, but as new monetary instruments with specific functional advantages and risks.

5. Singleness of Money Is a Policy Choice

The “singleness of money” is often presented as an inherent property of fiat systems. In reality, it is achieved through:

• Regulation

• Convertibility guarantees

• Central bank settlement infrastructure

• Lender-of-last-resort backstops

Commercial bank deposits are “single” only because public institutions enforce equivalence.

There is no theoretical impediment to extending similar treatment to:

• Licensed stablecoin issuers

• Bank-issued tokenised deposits

Singleness is therefore not threatened by multiplicity of issuers, but by absence of governance.

6. Legitimate Macro-Financial Risks

The RBI and other central banks rightly identify several real risks:

Currency substitution and dollarisation

Stablecoins reduce frictions in holding foreign-denominated assets. This magnifies existing pressures on weaker currencies but does not create them.

Capital flow volatility

Tokenisation increases speed, but speed already exists in modern payment systems. India's UPI is the best example of such speed at scale. The issue is policy responsiveness, not technology per se.

Monetary policy transmission

Unregulated stablecoins could weaken bank intermediation. This risk diminishes significantly if stablecoins are:

• Issued by regulated entities

• Integrated into prudential frameworks

• Subject to reserve and liquidity requirements

Seigniorage erosion

Loss of monopoly rents is a political economy concern, not automatically a welfare loss.

7. Innovation Versus Institutional Protection

Many stablecoin “risks” reflect potential disruption to incumbents rather than systemic instability.

Historically, similar arguments were made against:

• Eurodollar markets

• Money-market funds

• Electronic payments

• Real-time retail payment systems

In each case, policy evolved from resistance to accommodation.

Central banks should distinguish between:

• Systemic risk (justifying restriction)

• Competitive pressure (justifying adaptation)

8. The Real Policy Challenge: Functional Success

The most candid observation in recent central bank commentary is that the greatest threat is a stablecoin that works.

A stablecoin that:

• Settles instantly

• Integrates with tokenised assets

• Enables programmable financial contracts

Will attract usage regardless of doctrinal objections.

This is not a failure of policy—it is a signal that existing systems have unmet needs. Yes, we have yet to see a diversity of use cases operating at scale, and the ecosystem components are still emerging.

9. A Pragmatic Global Policy Framework

A coherent global approach would recognise a plural monetary ecosystem to enable a digital, tokenised economy:

• Central bank money (CBDCs) for sovereignty and policy transmission

• Commercial bank money, including tokenised deposits

• Licensed stablecoins, subject to:

• Interoperability, not exclusion

This framework preserves monetary control while allowing innovation to occur within the regulated perimeter.

Conclusion

Stablecoins are neither a threat to monetary order nor a replacement for sovereign money. They are an evolutionary response to:

• Digital settlement demands

• Globalised capital flows

• Tokenised financial markets

Central banks are right to defend stability—but stability has never meant stasis.

The choice facing policymakers is not whether stablecoins should exist, but whether they emerge inside or outside the regulatory system.

History suggests that systems that integrate innovation on disciplined terms outperform those that attempt to suppress it.

[NB: ChatGPT has been used to draft this article, but with all arguments provided by the author. Comments are very welcome!]