Economist Eric Monnet: "Stablecoins Have Become a Major Political and Geopolitical Issue"

Economist Eric Monnet warns that stablecoins pose a significant threat to existing monetary systems and risk increasing emerging economies' dependence on the dollar. In an op-ed, Monnet urges Europe to develop an international strategy, collaborating with vulnerable nations to address the systemic challenges posed by these digital assets. This article explores Monnet's critical assessment of stablecoins, their inherent risks, and their potential to destabilize global finance if left unregulated.

PARIS — According to economist Eric Monnet, "Stablecoins have become a major political and geopolitical issue," demanding urgent attention from global policymakers. Monnet argues that these digital assets could destabilize existing monetary systems and heighten the reliance of emerging economies on the U.S. dollar, necessitating a proactive international response.

Monetary and financial history is punctuated by technical and institutional innovations—from bills of exchange to bank notes, bank deposits, and electronic transfers—all of which have transformed how we pay, borrow, and save. Stablecoins are the latest in this lineage, though their novelty is primarily monetary: they present themselves as a means of payment and a store of value, rather than a credit instrument. Like any innovation, they promise efficiency gains but also carry significant risks that must be carefully assessed to determine if they constitute genuine progress.

A stablecoin is a digital currency issued by a private company and recorded on a blockchain, which is a public database tracing all transactions. The innovative aspect of this technology is its ability to enable near-instantaneous and low-cost circulation globally, bypassing the traditional banking system. The issuer commits to maintaining parity between its stablecoin and an official currency—euro, dollar, or otherwise—by holding reserves.

However, a fundamental vulnerability exists: if these reserves are insufficient, lack liquidity, or lose value during a crisis, the issuing company cannot honor its promise, causing the stablecoin's value to plummet. Such incidents have occurred multiple times, illustrating that these currencies are not inherently "stable." Their stability is entirely dependent on the issuer's reserves. This creates a critical conflict of interest: issuers are incentivized to invest their reserves in riskier, higher-yielding assets, as this forms the core of their business model, allowing them to collect interest without passing it on to stablecoin holders.

This mechanism inherently encourages risk-taking, an incentive that becomes even stronger in the absence of robust regulation. Monetary history clearly demonstrates that every unregulated monetary innovation eventually leads to falsification, conflicts of interest, corruption, and crises. Monnet's analysis underscores that without comprehensive oversight, the potential for systemic instability from stablecoins is substantial. Monnet's call for Europe to collaborate with vulnerable countries on an international strategy against unregulated stablecoins emphasizes the urgent need for global cooperation to safeguard monetary stability and mitigate geopolitical risks in the digital age.