King's College London

An important regulatory debate has emerged around the concept of “singleness of money” - the principle that all forms of money in an economy, whether physical or digital, should be valued on a one-to-one basis at all times and in all circumstances. A paper published today by eight leading experts on digital money argues that an idealised and literal definition of the ‘singleness’ of money could stifle the benefits of innovation from an emerging new class of money known as stablecoins, specifically fiat-referenced, regulated stablecoins¹, and proposes an alternative approach.

Stablecoins are designed to hold stable parity with other forms money but are frequently exchanged at a slight deviation from par with their referenced fiat currency. Some policymakers have argued that this phenomenon means that stablecoins do not meet the criteria of ‘singleness’ and so are unsuitable for large scale adoption or use in financial markets as money. The paper’s authors, however, advocate for a more flexible approach to what constitutes ‘singleness’ for practical purposes and outline the regulatory considerations, potential design improvements and other factors that could underpin the singleness of stablecoins.

The paper points out that in practice, our current monetary system already entails multiple minor deviations from the singleness of money: situations when for different reasons, individuals may not be able to either access or use cash or make and accept digital payments. Extensive regulation and systems have been developed to minimise these deviations and preserve financial stability. The authors sketch out a proportionate approach to stablecoin regulation that adapts elements of that system to the features and risks associated with stablecoins.

In particular, they focus on stablecoin issuers’ use of backing assets and redemption rights to maintain a stable value in the referenced currency. Confidence in a stablecoin’s backing assets is fundamental to ensuring that holders can exchange them with other market participants for other forms of money or redeem them with the issuer, a feature that is essential to their ‘singleness’. Regulators could reinforce this confidence through regulation on:

• the kinds of assets eligible to be used as backing assets
• the proportion of a stablecoin in circulation that an issuer must be able to redeem at any time
• terms and conditions that may make redemption costly and slow
• the use of third parties to redeem stablecoins

Further suggestions to increase confidence in stablecoins and enhance their singleness include considering facilities to offer liquidity support in a crisis situation, secured against the issuer’s backing asset reserves, or consideration of schemes akin to traditional deposit insurance, such as the UK Deposit Guarantee Scheme.

The paper’s authors are Rhys Bidder, Kene Ezeji-Okoye, Matthew Osborne, Jannah Patchay, Elise Soucie Watts, Varun Paul, Tom Rhodes and Andrew Whitworth. All of the authors have contributed to the paper in a personal capacity, and the views expressed therein are not reflective of their organisations and affiliations.

For further information, please contact:

Elise Soucie, Executive Director, Global Digital Finance: Elise@gdf.io

Jannah Patchay, Director, Markets Evolution: jannah.patchay@marketsevolution.com

Further reading

1. Chainanalysis provides a useful summary of the different kinds of stablecoins and the regulatory requirements for stablecoins in several key jurisdictions.