Stablecoins Are Not the ‘Future of Payments’, Say NY Fed Economists

WATCH LIVE: “Digital Assets and the Future of Finance: The President’s Working Group on Financial Markets’ Report on Stablecoins”

article-image

Federal Reserve Bank sign closeup in downtown lower financial district Manhattan, NYC | Credit: Shutterstock

share

key takeaways

  • Stablecoins, whose value is either fully backed by safe assets or not, could tie up liquidity in other areas of the traditional financial sector, according to a group of NY Fed economists and analysts
  • The group is advocating for tokenized deposits hosted on DLT systems that would represent a claim on the depositor’s commercial bank instead

A group of analysts and economists from the Federal Reserve Bank of New York said Monday stablecoins were “unlikely” to become the future of payments despite their rapid rise in recent years.

In a Liberty Street Economics column, published on the Fed’s blog, the group said that while stablecoins were designed to be a better form of money than other cryptocurrencies, like bitcoin, they may be a “double-edged sword.”

Stablecoins are cryptos whose values are pegged to particular commodities like gold or fiat currencies, such as the US dollar and euro.

Specifically, the group, which included former NY Fed Vice President Rod Garratt and Fed economists Antoine Martin and Michael Lee, said stablecoins that are backed 100% by “perfectly safe” assets could tie up liquidity in other areas of banking.

Stablecoins that were not backed and did not tie up liquidity resembled private banknotes from bygone eras, resulting in a “risky and less fungible” product.

“These types of private monies were subject to various problems, notably because issuers and the assets backing them were of uncertain and divergent quality,” the group said.

Instead, the NY Fed is advocating for tokenized deposits rather than stablecoin circulation.

“Bank depositors would be able to convert their deposits into and out of digital assets — the tokenized deposits — that can circulate on a [distributed ledger technology] platform.” The tokenized deposits would represent a claim on the depositor’s commercial bank, much in the same way a regular deposit does, the group said.

Their stance comes as no surprise, given their institution’s history of taking a hardline approach to crypto regulation alongside recent stablecoin growth, from $5.7 billion in December 2019 to $155.6 billion in January 2022.

Indeed, stablecoins have begun to disrupt the remittance and cross-border payments sectors across multiple economies. They are also considered a threat to the US’ economy and financial stability, among other nations. Last year, US Federal agencies called on Congress to allow them to regulate stablecoin issuers in the same way they regulate banks.

The group’s column comes a day ahead of a US House of Representatives Financial Services Committee hearing titled “Digital Assets and the Future of Finance: The President’s Working Group on Financial Markets’ Report on Stablecoins.”

The hearing will center on the swift growth of pegged cryptos while discussing findings from the report by the president’s working group, which determined in November that stablecoins pose legal, regulatory and oversight challenges.


Live at 10 am ET


Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the Forward Guidance newsletter.

Get alpha directly in your inbox with the 0xResearch newsletter — market highlights, charts, degen trade ideas, governance updates, and more.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.

Tags

Upcoming Events

Javits Center North | 445 11th Ave

Tues - Thurs, March 18 - 20, 2025

Blockworks’ Digital Asset Summit (DAS) will feature conversations between the builders, allocators, and legislators who will shape the trajectory of the digital asset ecosystem in the US and abroad.

recent research

Unlocked by Template.png

Research

RTK networks are critical to enabling a world of ubiquitous autonomous drones, vehicles, and industrial robots. We believe the GEOD token enables both a cost and product advantage for the GEODNET RTK network, which will allow it to out-compete multi-billion dollar incumbents Trimble and Hexagon.

article-image

Jack explored the various AI and memecoin projects that have sprung up over the past month

article-image

If gold remains steady today, a single move from bitcoin to $98,500 would do it

article-image

Revenue estimates for the third quarter come in at $33 billion, which would be an 83% increase from the prior year

article-image

Senator Cynthia Lummis hopes a US strategic bitcoin reserve can be teed up for “adoption in 2025”

article-image

As EIP-4844 “blobs” transform the economics of Ethereum layer-2s, a growing debate pits long-term scalability against immediate ETH value

article-image

Prosecutors argued that FTX co-founder Gary Wang cooperated in their case against former FTX CEO Sam Bankman-Fried