Stablecoins are a particular type of cryptocurrency that aims to retain a steady value by pegging their value to another asset, such as gold or the US dollar. Even though stablecoins are proposed to be safe, some people question their reliability. Recently, Adrian Orr, the governor of the Reserve Bank of New Zealand (RBNZ), gave a strong warning about the potential hazards and limitations of stablecoins.

What are the problems with stablecoins?

According to Orr, stablecoins are “the biggest misnomers” and “oxymorons” in the crypto space. He said that stablecoins are not stable at all. They rather depend on the balance sheet of the issuer or the custodian of the underlying assets. If the issuer or the custodian faced any financial or legal troubles, the stablecoin holders could lose their money or access to their funds.

“Stablecoins are not stable. They’re only as good as the balance sheet of the person offering that stablecoin.”

Adrian Orr, Governor of the Reserve Bank of New Zealand

Orr argued that stablecoins are not a substitute for central bank-issued, government-backed fiat money. He emphasized that fiat money is the best kind of money due to its low and stable inflation rate. It can be used as a means of exchange, a store of value, and a unit of account. In contrast, he stated that Bitcoin, the most popular cryptocurrency, fails to meet these criteria. It had other purposes but not as money.

What are the implications of Orr’s remarks?

Orr’s comments reflect a growing concern among central bankers and regulators regarding the impact of stablecoins and other cryptocurrencies on the global financial system. Some experts worry stablecoins could threaten the monetary sovereignty and stability of nations, particularly if they become widely adopted and used for cross-border payments and remittances. Stablecoins could also enable money laundering, tax evasion, and other illicit activities, which would undermine the authorities’ efforts to protect consumers and include them financially.

According to Orr, the Reserve Bank of New Zealand (RBNZ) has no plans to introduce its own digital currency anytime soon, unlike some other central banks exploring or developing their own central bank digital currencies (CBDCs). Orr stated that the RBNZ is not in a hurry to create a digital version of the New Zealand dollar. The focus is to improve the existing payment systems and ensure their resilience and efficiency.

What are the perspectives of other experts?

Not everyone in the crypto industry and the academic world shares Orr’s views on stablecoins. Some experts point out several benefits over fiat money, such as lower transaction costs, faster settlement times, and greater transparency and auditability. Additionally, some people argue that stablecoins can act as a hedge against inflation and currency devaluation. They can also provide greater financial access and inclusion for those who are unbanked or underbanked.

Stablecoins have gained popularity as a reliable form of cryptocurrency. However, even supporters of their use acknowledge the risks and challenges involved in using and regulating them. Stablecoins must have adequate reserves and safeguards to ensure their stability and security. They must also comply with relevant laws and standards to prevent fraud and abuse. Experts recommend classifying and regulating stablecoins according to their different features and functions. They must be subject to oversight and supervision by the appropriate authorities.

Stablecoins are a topic of controversy and complexity within the crypto world. There is no consensus on whether they are safe or not. Some consider them a promising innovation that could potentially enhance the efficiency and inclusivity of the financial system. Others see them as a potential threat that could destabilize the monetary order and enable illicit activities. The debate is likely to continue as more stablecoins emerge and evolve and more central banks and regulators weigh in on their implications and regulations.

Read more: NZDD Stablecoin Launch: Transforming New Zealand Finance