Crypto enthusiasts would argue that it's hardly been a successful few years for central banks though, with rampant money printing leading to red-hot inflation that's out of control.
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The events of 2022 have shown that crypto cannot replace sovereign, central bank-issued currency.
That's according to the head of the Bank for International Settlements (BIS), a central bankers association, in an interview on Feb. 22.
"I think that battle has been won," Agustín Carstens, general manager of the BIS, told Bloomberg. "A technology doesn't make for trusted money."
The BIS has long been a strong opponent of crypto. Earlier this week it released a paper arguing that small investors were hurt far more than wealthy ones by the crypto winter's price collapse, and that the damage was far worse in emerging economies like India, Turkey and Pakistan.
Carstens was interviewed at the Singapore FinTech Festival, where he delivered a speech on Wednesday arguing that the events of the past year have "cast serious doubts on the ability of stablecoins to function as money."
Pointing to the $60 billion collapse of the TerraUSD algorithmic stablecoin and the bankruptcy of FTX in a $10 billion explosion of fraud, Carstens said:
"What sustains fiat money is not the application of novel technologies but all the institutional arrangements and social conventions behind it."
Crypto enthusiasts would argue that it's hardly been a successful few years for central banks though, with the likes of the Federal Reserve and the Bank of England engaging in rampant money printing during the coronavirus pandemic. This led to sky-high levels of inflation in major economies that have proven difficult to bring under control.
They'd also proffer that Bitcoin has achieved a lot in its 14-year existence, that Rome wasn't built in a day, and that Western critics in developed countries with stable currencies often fail to realize the value that digital assets can have in emerging economies suffering from hyperinflation.
CBDCs v Stablecoins
The problem with stablecoins — even those that maintain their peg to the dollar, euro or other fiat currencies — is that they don't have any of the protections of fiat currency, notably the lender-of-last-resort support of central banks that gain their credibility from the countries that issue them, he said.
"The past year's events have cast serious doubts on the ability of stablecoins to function as money," Carstens said, adding:
"Stablecoins must import their credibility from sovereign fiat currencies."
When that happens, he added:
"We lose an important part of the soul of money."
That said, Carstens noted that there are lessons to be learned from stablecoins, which have grown because they offer technical capabilities that fiat currencies do not yet.
A much better solution, he said, is the central bank digital currency (CBDC), which "shows great benefit" in developing a "unified ledger" that would bring many of the benefits crypto supporters attribute to cryptocurrencies and stablecoins.
These include promoting financial inclusion, speeding the settlement and lowering the cost of transactions, automating transactions and allowing for the use of smart contracts and composability — meaning the ability to bundle those smart contracts in a way that lets them act like "money Lego," he said. Carstens added:
"It is incumbent upon central banks to make sure they contribute to developing an infrastructure that meets these demands: If central banks do not innovate, others will step in. In the meantime, we must ensure that stablecoins do not harm investors and consumers, or contribute to a fragmentation of the monetary system."
