LONDON – The eurodollar market – comprising dollar-denominated deposits held outside the United States – emerged in the late 1950s to meet global demand for dollar liquidity, while avoiding the regulatory costs associated with dollar-denominated financial intermediation. Initially viewed with suspicion, not least from US authorities, the market was soon integrated into the global monetary system, with the US even providing partial supervision. It is now indispensable to global finance.
This pattern has recurred throughout financial history. Prior to the 2008 financial crisis, “shadow banks” – investment banks, structured investment vehicles, and money-market funds – created money-like liabilities, which were not secured by the US Federal Reserve. When confidence collapsed, liquidity evaporated, leading to credit freezes, fire sales, and bankruptcies. To ensure their survival, major financial institutions such as Goldman Sachs and Morgan Stanley transformed themselves into bank holding companies, thereby gaining access to central-bank liquidity and deposit insurance.
While financial innovations often emerge on the system’s periphery, beyond the reach of regulation, if they prove to be systemically important, they end up being integrated into the system’s regulated core. Moreover, when private entities issue money-like claims at scale, they eventually seek out – or are compelled to obtain – central-bank backing.
Stablecoins, privately issued digital tokens backed by external assets, are likely to follow the same trajectory. What remains unclear is precisely how they will be integrated into the monetary system, by which actors, and under what institutional framework.
The answer will depend significantly on regulation – specifically, whether the US or European approach prevails. To be sure, authorities in both the US and the European Union have so far pursued a custodial model, treating stablecoin issuers as payment intermediaries, rather than deposit-taking lenders. But that is where the similarities end.
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