Stablecoins' Hidden Risk: Dollars Remain Offshore

The stablecoin market value has reached around $320 billion as of the end of May, according to the Bank for International Settlements (BIS). This figure is a significant milestone in the growth of digital currencies. However, the BIS report highlights that stablecoins have not yet achieved the property of singleness, which means that redemption is uneven and secondary market prices can drift off the peg.

The majority of dollar-pegged stablecoins are backed by short-dated government bills, bank deposits, reverse repos, or ordinary dollar funding markets. In fact, issuer holdings of Treasury bills have grown large enough to rival those of major sovereign holders and government money market funds.

Despite the hype surrounding decentralized finance (DeFi), self-custody does not eliminate the risk associated with stablecoins. A user's control over a token is secured through their wallet, but it does not address the legal chain connecting them, the issuer, and the reserve account.

The growth of stablecoin adoption has led to concerns about dollarization in emerging markets. The BIS notes that stablecoins could erode monetary sovereignty, similar to old-fashioned deposit dollarization. However, some experts believe that a unified ledger built on tokenized central bank reserves could provide a solution to this issue.