Who will win the battle for the future of money?

April was full of stablecoin politics, furthering the idea of ​​a global race to tokenize cash. In my opinion, this is not a single race – it is a competition across several disciplines. We should cheer for the right to compete freely rather than one winner.

In mid-April, the US House Financial Services Committee proposed a bill to regulate fiat-backed stablecoins, while limiting other support mechanisms, and instructing the Fed to study the digital dollar. Fast forward to last week, when Republican presidential candidates rallied against the idea of ​​a digital dollar, calling it a China-inspired surveillance tool.

Dea Markova is CEO and Head of Digital Assets at Forefront Advisers.

In Europe, the European Central Bank (ECB) is losing political support for the digital euro. Nevertheless, the ECB declared last Monday that its investigation phase is progressing in line with an October deadline. Being ahead of the US and UK has forced Europe to face some of the really tough CBDC questions: Can you roll out a public tokenized instrument at scale? What is a viable commercial model? What are the use cases? How is privacy safeguarded?

Although privacy is being thrown around like a political hot potato, the other three questions are, in my opinion, much more difficult to answer. For the avoidance of doubt, with only a few months left on the ECB’s timeline, they have not been convincingly answered.

Also in April, Société Généralé launched a euro stablecoin on Ethereum, available to know-your-customer (KYC) institutional customers and giving them direct access to their locked security. EUR CoinVertable will be credit assessed. A day later, the crypto developer community criticized SocGen for building in features that allow it to drain customers’ wallets, and that require a centralized validation of every transaction — you know, like a bank does.

Meanwhile, banks around the world are looking for models to tokenize their deposits in a way that somehow fits with KYC requirements and makes sense for deposit guarantees. The Bank for International Settlements (BIS) suggested in early April that the best way to do that was in two steps.

Step One: Abandon the idea of ​​stablecoins as bearer instruments. The logic that “he who has it, owns it” cannot work with KYC rules, it said.

Step Two: Tokenize deposits and replicate the commercial banking settlement system via a wholesale CBDC. That way you avoid the problem of converting, for example, ING coins to HSBC coins, BIS said.

The Bank of England believes tokenized deposits are “regulatory simpler” (aka a good thing) and that a bank would be better off issuing stablecoins from a separate entity. Pay attention to the latter.

These recent developments are good examples of the strengths and weaknesses of the various types of tokenized money we have emerged. We have four credible options on the table – fiat-backed non-bank-issued stablecoins like USDT and USDC, fiat-backed bank-issued stablecoins like EUR CoinVertable, CBDCs and tokenized deposits.

They are all competing for market share, and the race will only intensify as the challengers mature. Politicians are often tempted to talk about a winner-takes-all scenario. For the ECB, the winner is the digital euro.

I would argue that this is not a race. We are looking at the “Stablecoin Olympics”, with challengers competing across different disciplines. No one is equipped to win them all at once.

The disciplines are five: trust, credit risk, interoperability, cyber risk and profitability.

Trust is the Olympic event that CBDCs can win most convincingly. While concerns about privacy and surveillance come up, the vast majority of the market agrees that the central bank is the institution in a country that they trust the most. The nations where this belief is thin are exceptions. That is why the banks in Europe are so worried that if they could, depositors would rather keep their savings with the ECB. The ECB in particular also spends a lot of effort on privacy.

Credit risk is a closely related discipline. Stablecoins bear the risk regardless of where their reserve funds are held. Commercial banks bear their own risk. CBDCs bear the sovereign’s risk. I would see this place for credit scoring as a way to predict who will get the medals.

The interoperability race is currently going to private stablecoins. They are the most liquid instrument on the market. Circle, the issuer of USDC, has just launched a cross-chain protocol as well. Most institutional projects use permissioned ledgers, which by definition limit access and interoperability. As the BIS research flags, there are also significant design complexities for interoperability between tokenized instances.

The cyber attack incident is too close to call. The choice of a ledger, whether open or proprietary, proof-of-work or proof-of-stake, makes all the difference. Many in the community would dispute that the Bitcoin blockchain is the most secure out there if security is the ultimate goal. In EU regulation, both stablecoin issuers and banks will be subject to a cyber law called DORA. Therefore, the operational resilience safeguards applicable to their choice of technology will be the same.

Last but not least is profitability. A sustainable form of future money must be profitable for its issuers – unless it is a subsidized public utility. In a high interest rate environment this is less of a problem. Stablecoin reserves are, or will be when regulated, mainly in government bonds. However, in a low interest rate environment, it is currently much easier to see how tokenized deposits can monetize the banks’ fractional reserve model.

Stablecoin Olympics will evolve driven by regulatory choices and organizational behavior. Some structures are set to innovate faster, others to manage risk better. Politics and perceptions are important for partnerships and financial stability. As consumers, our best outcome is to get to a tokenized cash marketplace where we can choose our champion based on our use case.