BIS report finds stablecoin less desirable than tokenized money

The singleness of money is the assurance that public and private money trade at the same rates. Even minute disparities between public and private money rates can have a domino effect on transactions.

A working paper from the Bank for International Settlements (BIS) contrasted private tokenized money models in terms of their suitability as a supplement to a central bank digital currency.

According to the paper, tokenization is “the process of representing claims in a digital form that enables them to be transacted on programmable platforms using smart contracts.”

Tokenized money can be a bearer instrument in which the claim on the issuer is transmitted without altering the balance sheet of the issuer. Stablecoins are a good example.

Bearer instruments were prevalent in the United States during the era of “free banking” before the establishment of the Federal Reserve, when money could be discounted by its recipients, according to the authors of the paper.

They drew a parallel between this circumstance and the devaluation of stablecoins on permissionless exchanges.

Alternately, tokenized money can be a non-bearer instrument, where the originator is debited and the receiver is credited on their respective balance accounts as central bank money is used to resolve the transaction.

Currently, the commercial banking system follows this model.

With the correct design, the use of central bank money to resolve tokenized money that is a non-bearer instrument ensures a consistent exchange rate, as “this paradigm requires that both public and private forms of tokenized money are accessible on the same platform.”

Maintaining the distinction between digital currency and cash depends on regulation:

“Singleness between private tokenised money and cash would be supported in the same way it is now for commercial bank deposits, provided all private tokenised money issuers comply with the same regulatory standards and have access to the same safeguards.”

Simultaneously, a second brief BIS working paper analyzed tokenization and identified a continuum of challenges and benefits associated with the process, depending on the character of the underlying assets.