(Not) making headway: Stablecoins as payment instruments?

The Bank for International Settlements (BIS) has just published a new report on CBDC & cryptoassets, entitled “Making headway – Results of the 2022 BIS survey on central bank digital currencies and crypto”. The report is based on a “survey of 86 central banks conducted in late 2022”. While the focus is firmly on CBDC, there is another aspect in the report that I would like to highlight: the (dis)use of stablecoins in the real economy.

To quote BIS: “Apart from being used in decentralised finance (DeFi) and crypto trading, stablecoins are hardly used for payments outside the crypto ecosystem.”

What does that mean? Obviously, the role of stablecoins like Tether in crypto asset trading is indisputable. In ECB’s macroprudential bulletin (18/2022), Adachi et al. have found that the “largest existing stablecoin, Tether, has already become critical in crypto-asset trading”. One source puts Tether at around 70% of all reported trading volume on exchanges (as of 2022). Furthermore, transaction volume of stablecoins on centralized exchanges dwarfs on-chain transactions, which are used for example when buying or selling NFTs.

But why have stablecoins failed to find significant use as a means of payment in the real economy? Usually, their relative (in)stability comes to mind, caused by the inherent risks of assets that back stablecoin. The value of those assets, e.g., commodities and treasury bills, can fall dramatically within a short period of time. Many articles have been written about that. However, there is a more significant problem with their use in retail payments: high transaction fees.

The reason for that problem is quite simple. Most of the popular stablecoins are based on Ethereum or comparable public blockchains, which are notorious for volatile fees. Adachi et al. summarize the situation as follows: “Stablecoins fall short of what is required of practical means of payment for the real economy”.

A study of on-chain Tether transactions in 2022Q1 has found a median gas price of 75.5 Gwei, which translates into $13. To quote: “Only 4.2% of fees are under the average $3.08 fee for out-of-network ATM transactions”. Even worse, for a reported 1.78% of transactions, fees exceed the transferred value. The author identifies a trend of rising gas prices, perhaps because of an increased popularity of Ethereum. Even if users switch to other, less busy blockchain platforms, they may face other issues, such as decreased resilience against double-spending attacks.

Therefore, the use of blockchain-based stablecoins so far does not appear to offer material advantages over existing payment schemes (Adachi et al.), perhaps because public blockchains have inherent scalability issues.

This perhaps gives a better idea about why the BIS report concludes that stablecoins are used outside of crypto assets only by “niche groups”, with cross-border remittances being by far the most popular, and consumer goods and services insignificant. This gap could be closed by CBDC, which is technologically more suitable for retail purposes.

This post has also been published on LinkedIn.