• CFRED CUHK Law

Cryptocurrencies, Stable Coins and the Growing Pressure for New Monetary Policies

David Kuo Chuen Lee - Singapore University of Social Sciences (SUSS);

Ernie G. S. Teo - NUS Business School


-- Traditional digital banking and payment technologies have been successful in the past, but perhaps not in the future. These electronic payment systems were dependent on bank deposits, credit cards or stored-value facilities; these payment intermediaries increased the costs and complexity of electronic payments, making it inefficient and expensive. Central banks are now harnessing the utility of cryptocurrencies for a new form of money that requires a modern form of monetary policy. These new ideas are explored in a recent paper authored by David LEE Kuo Chuen and Ernie GS TEO, "The New Money: The utility of Cryptocurrencies and the need for a New Monetary Policy".


To support the growing e-commerce sector, make full use of the digital footprints and increase payment efficiency, truly digital cash is in high demand. Digital cash shall serve as the digital replacement of physical cash, meaning that it should fulfil criteria such as to provide a store of value, a unit of account, a medium of exchange, as well as anonymity and transferability to the users, but it is more than that – digital cash should also be able to handle small transactions efficiently. On a technical level, digital cash needs to address the double-spending problem, the risk that it can be spent twice. These criteria are hard to satisfy, and the compromise usually results in high overheads, making the digital payment method inefficient and expensive. Many digital payments methods also do not meet the criteria of anonymity, and most forms of digital payments are traceable.


The invention of Bitcoin in 2008 seems to provide a potential solution, or at least a direction. It is truly peer-to-peer and offers built-in pseudo-anonymity. Bitcoin is anonymous by design such that owners’ identities are unknown to other network users unless they choose to reveal them. However, the patterns of usage or other information may reveal the identity through modern tracing using AI algorithms or via links with third parties. Decentralisation allows Bitcoin to remove the need to trust centralised middlemen and have no single point of failure. Incentive mechanisms were then incorporated to ensure that the interests of the participating economic agents of Bitcoin are aligned. Most importantly, ensuring transactions are correct and valid. The creation of Bitcoin also pioneered a new category of payment tokens termed “cryptocurrencies”.


The value of gold-backed currencies was rooted in the trust in gold. Bitcoin, however, is viewed as a hedge and its value has a negative coherence with stability and trust in the fiat system. During a crisis of confidence, the trust in a Government may shift to the use of bitcoin, which is essentially a trust in the Community or Cryptography. While the loss of trust in the global system is unlikely, the loss of trust in a country monetary system happens frequently, disrupting international remittances and financial stability. Several countries have declared some of these cryptocurrencies as legal tender or part of the legal payment system. With cryptocurrencies making up a small part of the monetary system, it is unlikely to destabilise the fiat system in the near term.


A more direct challenge to the fiat currency system and in particular the USD reserve system will be the non-fiat stable coin. Stable coins issued by non-government entities such as technology giants may stand a good chance of destabilising the USD-based monetary system if regulation fails to keep up with technology development. On top of this, countries with limited resources may turn to the technology provided by these private entities (such as the Libra project) to create digital versions of their currency. With wide adoption, a country or a group of countries with massive trade and capital accounts collectively may exert pressure on the USD-reserved based system in a very short period.


The fiat-based corporate-issued stable coin may be less of a threat, as these coins are likely to be heavily regulated even though they have a vast user base. However, as the use cases of these technology corporations grow, especially with smart contracts and decentralized applications (Dapps), this may change. As mega apps emerge from tech giants with their own social platforms, telecom network, online broadcast, mobility, proptech, telemedicine and eCommerce with a large volume of trades, corporate-based stable coins may play a much more significant role than we can imagine at this moment and very appealing to the more than half the world population that are excluded from the current financial system. With its reputation and financial muscle, a fiat-based corporate stable coin can transform into a coin based solely on the trust of the corporation. A cross-border community based monetary and payment system may evolve and may pose a serious challenge to the blockchain or DLT payment system initiated by governments.

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