Summary

Stablecoins have emerged as a popular medium of exchange in decentralized finance platforms, largely due to their pegging to fiat currencies. However, their largely unregulated status as a tool of private money creation poses significant financial fragility risks, highlighted by multiple episodes of mass withdrawals and collapses of several stablecoins. The increasing interconnectivity of stablecoins with traditional financial institutions, both as investors and custodians, has led to heightened concerns about potential risk spillovers between digital asset markets and traditional financial sectors. In contrast, central bank digital currencies (CBDCs) are increasingly recognized for their potential to revolutionize payment infrastructures and bolster the efficacy of monetary policies and banking systems. Yet, the realization of these advantages hinges on their careful and sophisticated design. Stablecoins and CBDCs are reshaping the landscape of financial markets, balancing their potential for innovation against the risks they may introduce to financial stability.