I am pleased to announce the publication of a new BIS working paper, “On Par: A money view of stablecoins.” The paper, by Iñaki Aldasoro (of the BIS), Perry Mehrling (of Boston University), and myself, argues that the key issue posed by stablecoins—moneylike crypto tokens—is par settlement. When and how can on-chain tokens be exchanged one-for-one with off-chain money? When does par settlement break down?
To answer this question, we make an analogy between stablecoins, which are on-chain moneylike instruments, and Eurodollars, which are offshore moneylike instruments. In important respects, on-chain stablecoins are like offshore Eurodollars. The longer history and more robust infrastructure of the offshore dollar system offers many lessons, in particular the importance of the relationship between onshore and offshore interest rates for smooth par settlement. Liquid forward markets move imbalances today into the future, buying time to resolve them without breaking par.
Conceptually, on-chain stablecoins are like offshore dollars, but the stablecoin system is far less liquid and far more fragile than the offshore dollar system. As we argue in the paper, stablecoins are a long way from being able to serve as monetary infrastructure.
The analogy between stablecoins and Eurodollars leads us to this graph, which shows that stablecoin issuance grew when there were arbitrage profits to be made, from 2021 to the middle of 2022. Rising off-chain interest rates have reversed the arbitrage, and stablecoin balances are now contracting:
Check out the paper on the BIS website.