Stablecoins' Role in Global Money and Power: Lessons from History

Crypto expert Carolyn Wilkins discussed the implications of stablecoins on international money and power at Queen's University in Belfast.

The introduction emphasized that payment systems can be used by governments to enforce economic sanctions, monitor financial flows, and project influence, making them a crucial part of economic statecraft.

The first question posed was whether private digital money can work safely at scale. Wilkins explained that stablecoins are fiat-backed claims designed to maintain a fixed value against sovereign money, often pegged to the US dollar. She compared Bitcoin to stablecoins, noting that Bitcoin is far more volatile and not suited for everyday payments.

The history of private money was used as an analogy to understand the potential success or failure of stablecoins. In 19th-century Britain, private banknotes circulated alongside Bank of England notes, with some issuing banks being stronger than others. This led to a system where reserves and crisis management became concentrated around the Bank of England.

The United States experienced similar lessons through its Free Banking era, where banks issued their own notes without necessarily trading at face value. The National Banking Acts attempted to fix this problem by requiring national banknotes to be backed by US government bonds, but another issue remained: the supply of currency could not expand easily when demand for liquidity rose.

The Federal Reserve Act eventually addressed these weaknesses by putting crisis-management functions on a permanent national footing. Across these historical experiences, several conditions for success stand out: credible convertibility, high-quality backing, uniform regulation, clearing and settlement arrangements, and credible arrangements for crisis management and loss allocation.