Soon after the Bank for International Settlements issued a report laying out a cautious stance towards stablecoins, the Trump administration cast itself as the “crypto capital of the world”. Where do these disparate visions come from? Taku Kinai finds ideological parallels in the British currency controversies of the 19th century.
In recent months, two reports presenting contrasting visions of the next-generation monetary and financial system have been released in quick succession. On 30 July, the White House, seeking to establish itself as the “crypto capital of the world”, published the Digital Assets Report. It outlines a vision for transforming finance and the broader economy through distributed ledger technology and digital assets.
The report emphasises decentralised transactions and transfers of ownership without intermediaries, with the help of smart contracts. The idea is that inefficient payment systems can achieve a fundamental efficiency gain led by the private sector, with the use of stablecoins, a class of crypto assets pegged to the US dollar and backed by safe assets such as government bonds.
By contrast, in its 29 June Annual Economic Report, the Bank for International Settlements (BIS) also highlights the potential of programmable distributed ledgers but takes a markedly different view. It rejects the idea of redefining money based on decentralised trust without intermediaries. In its assessment, stablecoins lack the requirements to function as money and will remain confined to a supplementary role.
Instead, the BIS calls for maintaining the two-tier system in which commercial banks provide deposits given settlement finality by central bank reserves. It further proposes a next-generation architecture, a unified ledger, that tokenises bank deposits and financial assets, such as government bonds, and consolidates them in a system combining distributed ledger technology with existing infrastructure.
What history says
Throughout history, money and payment instruments have evolved with technological progress, from coins to banknotes and eventually to deposits. In considering the future of finance in the digital age, the British currency debates of nearly 200 years ago provide a useful point of reference.
During the Industrial Revolution, Britain faced chronic shortages of metallic money, particularly low-denomination coins. Advances in signatures and printing, along with reforms in commercial law, enabled banknotes, initially circulating only among merchants, to spread more broadly as money. Banknotes thus emerged as a monetary innovation born of technological change.
In the 18th century, following the failures of governments, most notably in France, where banknotes had been used for fiscal financing, Britain allowed private banks to issue them competitively. Private institutions were thought to better meet the needs of commerce and industry, and competition was expected to enforce discipline.
Free banking, grounded in laissez-faire ideas, became one strand of the Banking School during the 19th-century currency controversy. James William Gilbart and others are often singled out as representing a distinct free banking school.
After the Napoleonic Wars, monetary expansion and frequent failures among country banks led economists such as David Ricardo and Henry Thornton, of the currency school, to argue for strict state control. Their view triumphed with the 1844 Bank Charter Act, which granted the Bank of England a monopoly on note issuance. Yet banknotes soon proved inadequate for Britain’s rapidly growing economy. Facilitated by the widespread use of cheques, private bank deposits quickly displaced notes as the dominant means of payment.
As the sole note issuer, the Bank of England took on the role of lender of last resort, lending its now-legal-tender notes to private banks facing runs. The modern two-tier monetary system took shape from this experience.
Parallels
Much like the currency controversy in Britain two centuries ago, today’s free banking school in the digital era stresses liberty and competition in open markets, with innovation led by the private sector. The US Digital Assets Report, however, not only prohibits consideration of central bank digital currencies (CBDCs) but also makes no mention of the central bank’s role. This omission reflects a longstanding American intellectual tradition of scepticism towards discretionary monetary policy, exemplified by Milton Friedman and Friedrich Hayek.
The new currency school, by contrast, emphasises stability, aiming to restrict new entry and preserve the incumbent two-tier system while incorporating new technologies. Yet it is ultimately users who determine whether new payment instruments are accepted. Just as bank deposits expanded outside regulation once banknotes were monopolised, stablecoins, envisioned by the BIS as merely auxiliary, may nevertheless spread globally.
The arguments
The BIS argues that stablecoins pose several risks. Because they can circulate anonymously without issuer oversight, they are particularly vulnerable to illicit use. Their value may also fluctuate with the creditworthiness of the issuer, as convertibility into legal tender is not assured. In addition, since stablecoins must be fully backed in advance with liquid assets, their supply cannot expand elastically, and fire sales of safe assets in times of stress could destabilise the financial system.
The Digital Assets Report takes a different position on illicit use, noting that technological safeguards can reduce such risks even in decentralised systems, and it calls for stronger regulation. Beyond this, reliance on issuer creditworthiness is not unique to stablecoins. Their difference from bank deposits is one of degree rather than kind. Stablecoins do not eliminate the credit-creation role of banks, and elasticity can continue to be provided by the banking system.
Nor is it clear that stablecoins, fully backed by liquid assets, are inherently less stable than fractional reserve banking. Indeed, after each financial crisis, economists have returned to proposals for narrow banking, based on 100 per cent reserves or a strict separation of credit creation from deposit and payment functions.
Recommendations
I consider the provision of finality by central banks, with the resulting singleness of money, to be a critical foundation of modern economic transactions. At the same time, I believe it would be misguided to categorically exclude stablecoins from the financial system. What is essential for the next generation system is not the exclusion of stablecoins but their integration into a reconfigured two-tier structure centred on the central bank.
This could involve granting stablecoin issuers access to central bank accounts, requiring part of their reserves to be held in central bank deposits and subjecting them to regulatory oversight. Should stablecoins achieve widespread use, a further option would be to apply to them the same central bank supervisory standards used with banks, while allowing a degree of flexibility in issuance.
Note
This article is from the London School of Economics blog published on 29 August 2025. To read it with links to more information go HERE
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