Can stable-coins shake banks?

The Blockchain’s latest invention, namely stable-coins, have attracted several comments notably on the disruption risk for the banking industry. We believe that these comments are largely misplaced.

According to well-informed anonymous sources, Facebook will launch a stable-coin in 2020. Although this is not the first attempt of this type (Telegram or JPM have already launched their own stable-coins), Facebook’s project, which is said to be backed by several well-known tech players (Visa, Uber, Booking.com, PayPal, MasterCard, First Data, etc.), has obviously attracted lots of attention. Unfortunately, as the concept of money remains largely misunderstood, this has added to the confusion already created by crypto-currencies and translated into misplaced comments on the potential impacts on the banking industry. As a consequence, we feel obliged to try to clarify things.

The numerous misplaced comments can be explained by the misconception surrounding the basic concepts at play. As learnt at school, one should never elaborate on a subject without having strictly defined the terms of the subject and its issue first.

The terms to be defined, in our view, are: money, bank deposits, Blockchain, cryptocurrencies and stable-coins.

The numerous misplaced comments can be explained by the misconception surrounding the basic concepts at play. As learnt at school, one should never elaborate on a subject without having strictly defined the terms of the subject and its issue first.

The terms to be defined, in our view, are: money, bank deposits, Blockchain, cryptocurrencies and stable-coins.

The issue here is: will stable-coins disrupt the banks?

What is money?

This is a claim over the state obtained in exchange for the sale of goods or a service. It is called back by the state at the time of taxation or “sterilised” through the issuance of sovereign bonds.

What is a bank deposit?

This is a claim over a private agent obtained in exchange for the sale of goods or a service and “insured” by the banking system and, eventually, the state, making it a close substitute to money. For more details about money creation by commercial banks please refer to our report “A bank’s cash flow statement: remove it or amend it”.

What is a Blockchain?

This is a technology of encryption of property titles which enables disintermediated digital transactions.

What is a crypto-currency?

This is an encrypted property title of the Blockchain’s capital which enables capital providers or holders to be remunerated. This is not money. To avoid confusion, central bankers have renamed it “crypto-assets” but this remains too vague, in our view. The term “crypto-share” would be more appropriate.

What is a stable-coin?

This is the encrypted version of money (i.e. of a property title of a future production) enabling the latter to be circulated onto the Blockchain using digital wallets.

Will stable-coins disrupt banks?

The answer is no. As mentioned above, they do not correspond to new money, whose production will remain endowed to the whole banking system. This is just a new digital way of transferring money from one banking deposit account to another (to enable transactions or reward users). Although it can have strong implications for the payment industry, thus explaining the apparent interest of major players, we see limited disruption potential when it comes to banks. Indeed, the private blockchains supporting these stable-coins will have to be plugged into the banking system: hence, Facebook’s stable-coins will be buyable through banks’ ATMs.

Of course, although Facebook will not replace banks, its proposed system of payment could translate into further loss of payment-related fees. However, although we lack data on the contribution of payment services, this is not a core business for banks. Also, assessing the final impact is a complex equation as the development of digital payments could accelerate the disappearance of the loss-making means of payment (namely coins, banknotes and cheques). And, lastly, banks still will keep the possibility of charging merchants or households at the time of the conversion of stable-coins into hard currencies.

It also has to be seen if a stable-coin-based payment system will be economically viable against particularly efficient existing systems and the implementation of instant payments by banks using phone numbers. Regulation could inflate the final cost, notably if the system is seen as a facilitator of fraudulent operations.