Cash Equivalence is a pop-up news service operated by Blind Spot Publishing dedicated to coverage of stablecoins and CBDCs. Its content is also available independently at www.cashequivalence.com for £10 per month.
Industry news:
— WLFI is introducing the idea of stablecoin buybacks.
— Paxos has launched PaypalUSD on the Stellar network.
— Paxos launched its enterprise-grade infrastructure platform.
Big if true:
— The FT’s Martin Arnold reported this week that crypto groups are hitting out at BoE attempts to limit stablecoin ownership.
Key graf: “BoE officials said it planned to press ahead with proposals for imposing ownership limits of £10,000 to £20,000 for individuals and £10mn for businesses on all systemic stablecoins — defined as any widely used for UK payments or likely to be in the future.”
Key response from industry: “Stablecoin issuers don’t have sight of who holds their tokens at any given time, so enforcing caps would require a costly, complex new system, such as digital IDs or constant co-ordination between wallets,” he [Simon Jennings, executive director of the U.K. Cryptoasset Business Council] said.
What’s the sourcing? Not clear. There is no direct attribution beyond “BoE officials said” and it’s not even clear to whom they said this. Poor journalistic practice.
The piece is pegged to a speech given by the BoE’s executive director for financial market infrastructure, Sasha Mills, in July, in which she noted: “Consistent with our position in the November 2023 Discussion Paper, we are also considering introducing holding limits for systemic stablecoins. These limits would be transitional and allow the financial system to adjust to new forms of digital money.”
She added: “The Bank considers it likely that, at least during a transition, limits would be needed for stablecoins used in systemic payment systems, to mitigate financial stability risks stemming from large and rapid outflows of deposits from the banking sector – for example sudden drops in the provision of credit to businesses and households – and risks posed by newly recognised systemic payment systems as they are scaling up.”
Cash Equivalence take: The discussion paper outlining the idea came out two years ago, so it’s fair to conclude the FT has been given some informal guidance that they’ve now decided to take this course. Indeed, when contacted, the BoE did not deny it.
Separately, we heard on the grapevine that the BoE was set to officially shutter its digital pound ambitions (albeit not its wholesale CBDC ones), but this was strongly denied by the BoE comms department at the time.
Applying strict limits to stablecoins in the U.K., even if on a temporary basis, would be a strong signal that the BoE worries about losing control of the sterling market. It’s one thing to apply holding limits on CBDCs to protect U.K. bank deposits, and another to prevent users from accessing USD or even GBP stablecoins.
Does it equate to a form of capital control? We think so. Can it be enforced? Not easily. Doing so would require digital ID to access the internet, VPN regulation, and the effective rollout of a “Great Firewall” of Britain.
More on holding limits:
— ECB learns to listen to EU countries to get deal on digital euro (via Politico)
Key graf: “The new proposal offers a compromise: It says the ECB will start a consultation with governments two years before the issuance of the digital euro, and will propose an overall limit one year before the issuance. This will need the support of a reinforced qualified majority among eurozone governments — the strongest possible majority used in EU voting procedures.”
Additional: Politico also reports that “the same reinforced majority will be necessary to tweak the ceiling proposed by the ECB” and that in a scenario where there is no decision, the ECB can go ahead to set the limit unilaterally.
Central banks:
— Chiara Scotti, who heads the Bank of Italy’s payment department, has reiterated EU concerns over the growing mismatch between European and U.S. crypto rules.
She noted that differing regulatory regimes in the U.S. and EU could allow for certain dollar-backed stablecoins to crowd out the euro.
Key graf: “This structural fragility is exacerbated by legal and operational risks. When an EU-based issuer holds reserves in a foreign currency (i.e. US dollars), those assets are usually located in the country where they were issued, often outside the EU. This means the reserves may be subject to foreign capital controls, regulatory restrictions, or settlement delays, particularly in times of market stress. Without strong safeguards — such as regulatory equivalence, the mutual enforceability of redemption rights, and the free transfer of reserve assets across borders — these arrangements become more vulnerable, opening the door to fragmented investor treatment, moral hazard, and broader systemic vulnerabilities.
Cash Equivalence note: Scotti is particularly concerned about so-called multi-issuance stablecoins such as Circle that allow multiple entities to issue and redeem the same stablecoin across jurisdictions.
Regulation:
— Former ECB and Bank of Portugal man Vítor Constâncio had many thoughts about stablecoins.
- Current MiCAR regulations are too restrictive:
Key graf: “I believe the suggested 60 percent cash reserve is excessive and could hinder the growth of stablecoins in euros. Remember that in my earlier post on stablecoins, I argued that issuers should be regulated similarly to banks, aligning with the views expressed in the Report to the President, endorsed by all US Regulators, the Financial Stability Board, and other international organisations.”
- Maturity rules on assets aren’t properly thought through in Europe:
Key graf: “Pragmatically, the US GENIUS Act establishes a maturity limit of 93 days for any instrument in the reserves from the date of purchase. With such a short duration, any capital losses would be minimal, and stablecoin issuers can choose amortized cost rather than mark-to-market. It is expected that stablecoin issuers will mainly buy 90-day Treasury Bills for their reserves, including some bonds close to maturity.”
- Europe doesn’t have enough triple-A sovereign debt to support euro stablecoins:
Key graf: “Another limitation to the expansion of stablecoins in euros is the insufficient size of triple-A sovereign debt, especially Treasury Bills, needed to act as safe and liquid securities for the issuers’ reserves. The US is much larger, and despite no longer enjoying full triple-A status, it benefits from being the dominant international reserve currency and is considered safer than European debt below triple-A.”
- The real purpose of stablecoins isn’t to create demand for USTs but to shift power from the Fed to the Treasury:
Key graf: “In any case, what the expansion of stablecoins enables is what has been called the ‘Treasury QE’ that is, the issuance of more short-term debt to finance the budget deficit at lower costs, similar to the effect of Fed QE. This strategy, initiated by Yellen and continued by Bessent, who previously criticised Yellen harshly, is much less risky if the Treasury can expect higher demand for T-bills from stablecoin issuers in the future. Meanwhile, T-Bill yields may fall by perhaps 2 basis points due to the additional demand. These developments suggest that the Fed may face less pressure to engage in QE in the future.”
- On the impact of stablecoins on eurodollar markets, Swift, repo and capital controls:
Key graf: “The use of stablecoins will decrease the volume of SWIFT messaging and correspondent banking activities. Conversely, the repo market may be slightly impacted since stablecoin issuers cannot act as borrowers, as they cannot pledge their securities within reserves, but they can become lenders since repos are allowed by GENIUS to be included in reserves. The legal status is less certain under MICA, but in principle, there is no reason why they should be excluded. Lastly, the widespread adoption of stablecoins will make it more challenging, but not impossible, to enforce restrictions on capital flows and the implementation of international financial sanctions.”
American regulation:
— The U.S. Treasury is moving to the rulebook implementation phase (Politico)
Key graf: “Treasury is seeking input on a wide range of issues, including how anti-money laundering rules should apply to stablecoin issuers, how state and foreign oversight of stablecoins should be evaluated, and whether tax rules need to be updated. The notice also signaled that Treasury could wade into an ongoing fight between crypto firms and banks over whether stablecoins can pay yield.”
Academia on regulation:
— A new paper from Imperial College/CEPR outlines how stablecoins can secure the UK’s financial future.
Overview: The academics are warning the Bank of England and the Financial Conduct Authority to resolve their differences on stablecoin regulation if the policy is to succeed. Their paper argues that clearer supervisory boundaries would “provide certainty” and that the current split risks undermining the sector. The same issue was highlighted earlier this month when Bank of England deputy governor Sarah Breeden said new rules would reduce the “cliff edge” between the Bank and the FCA. While the FCA allows issuers to use “secure, liquid assets,” the Bank has shifted from requiring only central bank deposits to permitting high-quality liquid assets. The academics criticized suggested limits of £10 million for institutional holdings, with professor Gilles Chemla noting that “the [foreign exchange] market has a global trading volume of over $7.5 trillion a day.” They conclude that “major uncertainties remain,” particularly around payment system integration and the lack of a coherent national strategy.
Analyst reports:
— Deutsche Bank’s big report on what stablecoins mean for dollar dominance?
What’s new or insightful? The analysts, Mallika Sachdeva and George Saravelos, make our longstanding point that stablecoins are to U.S. statecraft today what eurodollars were to statecraft in the 1980s. Notably:
“Even if eurodollars might initially have been a risk for US monetary sovereignty with dollars being held outside of US reserve requirement and interest rate regulation, they actually helped extend the stability and dominance of the USD at a time when it was under pressure. The support for stablecoins may have similar ambitions. During the time of the Bretton Woods gold-backed exchange rate system, offshore eurodollars helped the US manage balance of payments pressure. In today’s fiat currency system, where the value of the USD is backed by the fiscal capacity and creditworthiness of the government, stablecoins may be used to help manage fiscal financing pressure. The presence of a large stock of offshore USD is a unique feature of the US dollar.”
Cash Equivalence take: The above is true, but it misses that eurodollars also helped the U.S. to destabilize the managed currency regimes of communist rivals by empowering price discovery vis-a-vis the dollar on their black markets. Stablecoins could play a similar role today in countries like China, hence the panic.
Other DB insights: The analysts further argue that stablecoins will disintermediate the Fed from the settlement process for international payments in USD and that “this could reduce the Fed’s oversight over cross-border payments which would then occur on distributed ledgers rather than settling on the central bank balance sheet. This could mean a big change to the “centrality” of central banks in global payments, which helps unify the value of private dollars today. It may fit with a broader paring back of the Fed’s mandate by the current administration.”
A nice point on China: The analysts note that while China has started exploring yuan-backed stablecoins “their potential could be contained by the limited size of offshore RMB deposits.” Offshore CNH deposits in Hong Kong are just 0.3 percent of the size of the onshore CNY deposit base, while the comparable offshore eurodollar market represents some 75 percent of the onshore USD deposit market.
Also: “The offshore CNH deposit market has hardly grown in the past 10 years, after the shock of the August 2015 “mini-deval” led to a retrenchment of interest in holding the currency. We note that China still has a managed capital account, and thus issuing an onshore yuan stablecoin that global retail and corporates can freely subscribe to, may be harder to manage. China may not be ready to grant the world open access to the RMB in the way the US is. This could constrain China’s ability to compete in a stablecoins world, unless it starts to entertain bolder capital account openness.”
And finally, a warning to Xi: “The retreat of the USD based correspondent banking system has been most pronounced in the Global South, and this is therefore where China’s opportunity for internationalization of the RMB would be most obvious, dovetailing with a growing BRICS focus on local currency invoicing. If now, dollar stablecoins provide easy access to anyone in the Global South to USD-based cross-border payments, they could leapfrog the gains made by China in encouraging the use of RMB and China-backed systems down these corridors. In many ways, the battle for payments dominance is also a battle for influence in the Global South, one that is only likely to grow between the US and China.”
Yield wars:
— Paxos posted some thoughts on how interest rate changes influence stablecoin markets.
Key graf: “Interest rate cycles shape the emphasis of the stablecoin market – high-rate environments highlight yield and competition, while low-rate environments focus on adoption and utility. But the underlying trajectory is unchanged: stablecoins are becoming a core layer of global financial infrastructure.”
Cash Equivalence take: Not very deep thoughts, really. But the topic is worth revisiting, since we happened to exchange some truly deep thoughts on the matter with Fireblocks’ senior director for financial markets earlier this year. They touched on the natural countercyclicality built into the stablecoin system.
Digital Euro:
— Digital euro urgently needed to combat crypto threat, says Eurogroup chief (Politico)
Key grafs: “The pace of change with regard to the future of currencies is now only accelerating,” Donohoe told POLITICO on the margins of the Eurogroup, which hosts finance ministers of eurozone countries behind closed doors every month. “If we can’t make this happen, in a few decades’ time our successors will look back at where we are now and wonder why we didn’t recognize the scale of change that is coming,” said Donohoe, the de facto spokesperson for the views of the 20 countries that have adopted the euro.
Externalities
— Analyst Ed Yardeni wants U.S. Treasury Secretary Scott Bessent to confirm whether he is counting on stablecoins to finance a significant portion of the federal government’s debt. If so, he has a question: “Won’t that mean that the stablecoin money supply will increase dramatically and that the Fed will lose whatever control it has over the money supply? The result could be a very serious and prolonged rebound in inflation. Just saying.”
What we’re processing:
— J.W. Verret, a former top economist for House Financial Services Republicans, defends stablecoins (American Banker)
— Stablecoin liquidity hits a record high (Zerohedge)
— Matt Taibbi of “Vampire squid fame” does a deep dive on Trump’s World Liberty Financial stablecoin and asks cui bono from WLFI?
Cash Equivalence take: He’s obviously not familiar with our theory that the Blind Trust at the heart of the Trump stablecoin is likely to be a legacy-building bequeathment to the nation in the Augustan style.
— Auditor supremo Francine Mckenna argues regulation could help lead crypto from the Wild West to Wall Street in a piece for Chicago Booth Review.
— ECB working paper on central bank money as a catalyst for fungibility: the case of stablecoins
— Banque de France’s deputy dreams the dream that non-dollar stablecoins could spur the dollar’s decline (via Central Banking).
— ECB VP Luis de Guindos argues that stablecoins pose a bigger risk to financial stability in the US than in the European Union (via Central Banking).
