Satyajit Das: Stablecoins – Invention Looking For A Problem?

Yves here. One of the fundamental problems underlying the< regular promotion on innovation in finance is that “innovation” nearly always amounts to “better looting. But even with that strong incentive to “innovate,” Satyajit Das describes how even with yet another deregulatory push, stablecoins look a bit like a square peg attempting to be fit into a round hold.

On the general case, recall that Paul Volcker deemed the ATM to be the only innovation in banking he had seen in decades. The IMF found that the optimal level of financialization in terms of economic growth was the level seen in Poland shortly after 2010. More could work but only if there was tough regulation, a condition not observed in practice.

While crypto and stablecoin in particular offers the advantage of faster international funds transfers, sponsors, particularly government types, should be careful what they wish for. In real life, aside from small transaction or ones with known parties, irrevocable payments put the buyer/transferrer at risk (I have people I know personally who have been defrauded and almost certainly would not have been had they stayed in a regulated regime). It also exposes nations to large scale corruption on a scale that can have bad macro outcomes. In a Southeast Asian country (this intel is from insiders), the central bank has lost its ability to control its currency (which it otherwise manages to a fair degree) due to the influx of crypto to buy gold.

By Satyajit Das, a former banker and author of numerous technical works on derivatives and several general titles: Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives(2006 and 2010), Extreme Money: The Masters of the Universe and the Cult of Risk (2011) and A Banquet of Consequence – Reloaded (2016 and 2021). His latest book is on ecotourism – Wild Quests: Journeys into Ecotourism and the Future for Animals (2024). This is an amended version of a piece first published on 20 September2025 in the New Indian Express print edition.

Blockchains entails an encrypted database (the ledger) maintained by a dispersed network of private record keepers or validators who update and maintain a record of property rights and transactions by appending a new block through consensus. It has always been an invention searching for a definitive application.

Initially used as the basis for Bitcoin which was to replace money but has become the ultimate speculative asset, it morphed into in its de-fi (decentralised finance). Its latest incarnation is ‘stablecoins’, tokens using public blockchains (for example, Ethereum) with a monetary value of $1 equal to their backing by a fiat currency asset. They were originally designed to allow holders to transfer crypto currencies between exchanges, between exchanges and wallets or into cash. It avoided high transaction costs of crypto-to-fiat conversions and overcame some cryptocurrency exchange’s lack of normal bank accounts for fiat currency deposits or withdrawals.  Stablecoins, such as Tether, Circle and EUR CoinVertible, are now being positioned as an alternative global payment system.

The interest is in part driven by greater regulatory clarity in major jurisdictions, particularly the US via The Genius Act. The interests of Trump enterprises and those of some close supporters in the crypto sector is, of course, coincidental. Stablecoins also create demand for dollars and interest bearing short-dated US Treasury bills helping the American government fund its deficit. Current investment, which totals $200 billion (2 percent of outstanding securities) but is growing

Proponents cite several advantages. They offer near instant settlement while traditional payment systems, especially for foreign payments, can take up to 5 days. They are significantly cheaper than traditional funds transfers. Stablecoins payments are borderless and more efficient that current arrangements which rely on domestic and international bank-to-bank systems with layers of fees. Availability is also 24/7 and 365 days through modern digital interfaces. This benefit is overstated as modern bank funds transfers platforms are very similar although settlements are restricted to business times. With every technology entrepreneur trying to ‘improve the world’, there is the customary claim of inclusion with stablecoins opening access to underserved members of the community.

But there are concerns. Existing systems process $5 to $7 trillion in global money transfers daily. In contrast, stablecoin transactions facilitate $20 to $30 billion per day. Scaling up and improving speed requires compromisesincluding processing transactions off-blockchain or revised consensus verification protocols. They inherit data from an underlying layer reducing security and requires centralisation with a few large users playing a larger role moving away from the fully decentralised, democratised original technology.

The stability and acceptance of stablecoins requires provable high-quality reserves, typically cash or short government obligations. Verification of holdings remains problematic with some issuers based in offshore and subject to limited audits. There has been occasional de-pegging from the underlying unit of currency, mostly triggered by concern about reserve backing.

Unlike normal funds transfer systems which are backed by central banks with highly controlled access, blockchain based systems are more open with a corresponding loss of security. In addition, traditional systems have protection via manual interventions and detailed checks while digital currencies are less protected and vulnerable to wallet, custody or private key theft. The biggest risk is if the access point is compromised. Transactions are largely irreversible, and catastrophic losses may result where security is compromised or codes and key are lost.

Stablecoin’s claims of transparency are exaggerated. In theory, each step in a chain is known but on a public blockchain transactions often used pseudonymous wallet addresses which hide individual users’ identities. This contrasts with traditional banking where personal information is required. While stablecoins protect privacy it comes at the cost of accountability and financial integrity. In contrast, existing legacy systems, while cumbersome, allow routing and status to be traced and claims to be reestablished in case of problems.

Unlike fiat money, the amount of stablecoins is limited by the amount of available collateral, potentially interfering with economic activity, credit availability, trading and monetary policy execution. If stablecoins become established, then it will absorb outstanding securities and affect prices and liquidity of government securities. While stablecoins decrease short-term Treasury-bill yields, with effects comparable to that of small-scale quantitative easing on long-term yields, outflows have asymmetric effects raising yields by two to three times as much as inflows lower them. Banks would lose deposits which could be exaggerated during a financial crisis as depositors concerned about safety may switch to stablecoins exacerbating a bank run. As they provide access to foreign currencies, stablecoins may facilitate capital flight during periods of instability reducing a country’s monetary sovereignty. They create new channels for contagion spreading shocks within the financial system.

Stablecoins lack legal protection. There is no legal entitlement to the underlying assets and in the event of bankruptcy of the issuer holders will be unsecured creditors. This is complicated by the fact that the vast majority are issued by private firms frequently based in tax havens whilst operating internationally. The proliferation of stablecoins adds to the problem because of complex interoperability bridges with automated escrowing and reissuance of “wrapped” tokens on different blockchains.

As digital bearer instruments using borderless public blockchains, they bypass integrity safeguards. While this overcomes access hurdles for underserved citizens, it can facilitate potential illegal use, including for financial crime, as individual users’ identities are hidden behind addresses circumventing anti-money laundering and know-your-client regulations.

Money is ultimately based on trust and acceptance creating a common mechanism for trading goods and services and storing value, essential to the functioning of social and economic interactions. It is settled at par against a common safe asset (monetary reserves) provided by the central bank, which has a mandate to act in the public interest and is backed by the full faith and credit of the state. Blockchain based stablecoins seek to replace this with a dispersed network of self-interested, private record keepers. The incentive structures are complex and may create an insecure system where need for speed, handling volume and profit will inevitably dilute standards on what constitutes unanimous consensus.

Stablecoins are an attempt by privateers, using high-minded technological arguments, to capture a lucrative essential function for profit not social advancement. While existing arrangements are far from perfect, replacing a system which is tried and tested risks undermining trust especially when improving settlement times and reducing costs in traditional payments is easily achievable.