Symbiosis of Banks and Stablecoins
What is it about digital cash that attracts your attention the most? As I read through papers on CBDCs, tokenized deposits, and stablecoins, I am reminded of the old parable of the blind men and the elephant: everyone is describing a part of the picture but is missing the whole. Banks and regulators, in particular, have approached digital cash and distributed ledgers through the lens of their own biases. Many initiatives from the banking sector have launched, only to quietly disappear. In my view, these efforts failed because they ignored the principle at the heart of this revolution: permissionless-ness. Because if cash can’t move freely, and occasionally even get lost, is it really still cash?
It is not surprising that banks have been hesitant to embrace permissionless-ness. By definition, banks operate within permissioned gardens, heavily regulated and bound by rules for very good reasons. Crypto often takes for granted that today's financial technology stands on the shoulders of giants. While the current system has clear flaws, those flaws could only emerge after decades of iteration and refinement in how money is created and transferred. Distributed ledger technology represents another step in that long process of evolution. And just as crypto must recognise the achievements of traditional finance, banks and regulators will need to accept that letting go of total control over payment flows is inevitable. Permissionless blockchains are more like public streets: commerce happens openly, anyone can walk by, and banks, by opening their services on these streets, can serve legitimate business without being liable for everything that happens in public. Their role will shift, not to control the street, but to offer trusted services within it.
One initiative aimed at maintaining control over the “street” is the Regulated Liability Network (RLN). This initiative aimed at moving central bank money, commercial bank deposits, and e-money onto a shared, permissioned ledger, while preserving their original legal nature. Banks have strong reasons to pursue such a structure: they operate in the world of liabilities, not just assets. They are legally liable for the safe custody of their clients’ funds, and every deposit they hold represents a contractual obligation to return value on demand. Whereas Bitcoin and Ethereum are networks and assets in themselves, they do not offer a claim on anything unlike more familiar instruments such as equities or bonds. This distinction often fuels the tired argument that "crypto's have no value" because they lack an underlying liability.
Stablecoins are different, to the holder it is an asset and to the issuer it is a liability: a promise to redeem the token at par value. This liability is what gives stablecoins their perceived value, but it does not automatically make them money because they do not satisfy the singleness of money. Stablecoin holders are still exposed to issuer-specific risks. This exposure is exactly why corporates and banks are currently restricted from adopting stablecoins for major financial operations. Stablecoins are classified as financial instruments under accounting standards (IAS32), meaning they represent a contract and carry counterparty risk. In contrast, true cash equivalents (IAS7) must be readily convertible to a known amount of cash with insignificant risk of value changes. Until stablecoins meet these standards, financial institutions will continue focusing on developing CBDCs and tokenised deposits which are designed to meet legal and accounting definitions of risk-free money and operate in closed permissioned systems. As a result, corporates will remain locked out of participating directly in permissionless finance thereby limiting their ability to engage with the broader innovations happening on public blockchains.
Crypto idealists often argue that one day everyone will make payments directly in Bitcoin. But for everyday transactions, people still prefer money that preserves the store of value, medium of exchange, and unit of account functions of money. This explains why Tether has gained so much traction in countries where local currencies no longer fully serve these purposes. While I always understood why Tether never truly became a mainstream in developed economies, I found it harder to grasp why a compliant stablecoin like Circle’s USDC struggled to gain adoption in retail payments, despite clearly being an improved form of money. This picture became clearer when I learned that the founder of the Regulated Liability Network had pivoted towards building a clearing system for stablecoins. Instead of taking on the herculean task of moving all of the world’s liabilities onto a shared ledger, it would be more practical to take an incremental approach by leveraging what is already available. The United States’ pivot away from CBDCs and towards stablecoins was certainly a catalyst because it signals a clear shift toward the adoption of public blockchains by commercial banks.
This proposed clearing system will act as a neutral layer which enables users to deposit stablecoins into existing banks at par value. It does this by requiring stablecoin issuers to pre-fund settlement accounts to ensure immediate redemption by banks. This way liabilities can shift from stablecoin issuers to receiving banks while the platform handles clearing similar to how an FX clearinghouse would. This system would only act when stablecoins are converted into fiat at a bank thereby preserving the permissionless and peer-to-peer nature of stablecoins but also the transfer of liabilities which is so important to regulators. Important to note is that this approach also protects monetary sovereignty because it enables domestic institutions to receive and convert foreign stablecoins into domestic currency deposits. In my next article, I will take a much closer look into the details and provide a critical analysis of how this system is proposed to be structured and what roadblocks to look out for.
What draws me most to the idea of digital cash is the potential for widespread adoption of stablecoins and the flourishing of public, permissionless ledgers. Greater adoption and stronger network effects would attract more talent, drive improvements to today’s horrible user experience, and unlock a wave of new financial applications that could fundamentally re-architect the current financial system to make it fairer and more inclusive. I would love to hold risk-free euros in a self-custodial wallet, use them across decentralized finance applications, earn juicy yields, and avoid the need to manage a basket of different stablecoins for different purposes. Ultimately, the true promise of digital cash lies not just in the freedom of movement, but in the freedom to rebuild the financial system without permission and create a more egalitarian future.