A Stable Solution?

With the UK caught up in the drama of a general election, Christine Lagarde's first press conference as President of the European Central Bank ("ECB") slipped under the radar. But for those with their finger on the pulse, Ms. Lagarde had some very interesting comments about Stablecoins and the role the ECB could play in the future of money.

Stablecoins are a type of digital currency pegged to a physical asset or fiat currency. The thinking behind Stablecoins is that they are a less volatile alternative to other block chain cryptocurrencies, such as Bitcoin or Ethereum.

Ms. Lagarde suggested that the ECB is seeing significant movement with Stablecoins, and that the ECB "better be ahead of the curve…because there is clearly a demand out there that we have to respond to." She also stated that the ECB was setting up a digital currency taskforce and accelerating their efforts. Our latest article explained that whilst Central Banks are exploring a Central Bank Digital Currency ("CBDC") of some kind, very few have plans to implement one. Ms. Lagarde's comments indicate an aggressive shift in the ECB's policy, as she wants to be at the forefront of money's digital revolution.

It also represents a substantial divergence from her predecessor, Mario Draghi. As recently as September, Mr. Draghi expressed his scepticism over Stablecoins and crypto-assets as "suitable substitutes for money". Whilst he was willing to explore developments in the cryptocurrency industry, it appears Mr Draghi never really believed in their potential.

Stablecoins are not without their risks. There seems to be a certain paradox to them. In the quest for stability with cryptocurrencies, Stablecoins are supported by the very system the crypto-world seems intent on overthrowing – fiat currency. At their core, Stablecoins are essentially a fund whose unit is priced based on the underlying NAV.

Benoit Cœuré, who recently left the ECB for a position at the Bank of International Settlements to explore CBDCs, has warned that private sector Stablecoins are a cause for concern across a whole range of issues. They raise questions of "legal certainty, investor protection, financial stability and compliance with anti-money laundering requirements".

Notwithstanding these problems, it will be interesting to see the role the ECB plays in the coming years. Ms. Lagarde's comments are certainly another indicator that Central Banks will be closely involved with the digitisation of monetary systems.