Regulatory responses to the financial stability implications of stablecoins

In essence, the currently large stablecoins are electronic money issued by narrow balance sheet vehicles into a distributed ledger (or a "programmable platform"). Many believe that they will have significant success as a new form of money. Members of the current US administration expect that US stablecoins would circulate globally and support demand for treasuries and the international role of the USD. Related to the latter, recent industry initiatives plan to rely on US stablecoins as a settlement asset for cross-border payments ("stablecoin sandwich"). We discuss the comparative advantages of banks vs. non-banks as stablecoin issuers, as well as between MiCAR compliant and Genius Act compliant coins. We then review the implications of large global stablecoins on the financial system and discuss financial stability risks and remedies. We compare regulatory approaches across some jurisdictions and note that different directions have been taken, although most authorities seem to agree that stablecoins must not be remunerated. We discuss additional ideas how to address the risks associated with successful stablecoins, propose some basic regulatory principles and argue that prohibiting the remuneration of stablecoins does not necessarily foster financial stability. We suggest three options fulfilling the proposed regulatory principles.