The singleness of money
A key concept in the debate on stablecoins and other forms of DeFi is the principle of singleness of money – the idea that all forms of money within a currency area, including bank deposits and digital tokens, should trade at par with the central bank’s unit of account. In the traditional two-tier banking system, singleness is maintained through central bank infrastructure and liquidity support, ensuring trust and stability. In contrast, stablecoins and DeFi instruments operate outside these systems, making minor deviations from par common.
The extent to which such deviations are desirable depends on the context. Bidder (2025) argues that the real concern lies in large depegs during periods of stress, such as during the 2023 US banking crisis, which exposed the fragility of stablecoins under liquidity pressure. To address this, he proposes that stablecoins backed by high-quality assets be granted conditional access to emergency liquidity facilities. Likewise, Chiu and Monnet (2025) challenge the conventional view – often informed by the US free banking era – that non-uniform money necessarily leads to inefficiency. Instead, they advocate for a nuanced regulatory approach, such as Pigouvian taxes on sources of non-uniformity such as programmability of digital currencies or incentives to enhance token transparency.
The rapid growth of the stablecoin market, but not without risks
Stablecoins – digital assets pegged to fiat currencies – have rapidly evolved from niche instruments into a major segment of digital finance. While regulators in both Europe and the US have clarified the conditions under which stablecoins may operate, the new US administration—unlike its European counterpart—has firmly ruled out a role for a central bank digital currency and appears intent on relying on stablecoins for future innovation.
Gersbach, van Buggenum, and Zelzner (2025) discuss how the EU MiCA Regulation and the US GENIUS Act address systemic risks posed by stablecoins, focusing on reserve quality, redemption rights, and transparency. They suggest that well-designed redemption restrictions – such as gates or fees – should be permitted to prevent destabilising runs. They also caution against the remuneration of stablecoins, as interest payments could trigger destabilising competitive dynamics and coordination failures across issuers. In contrast, Uhlig (2025) is critical of the US regulatory framework that prevents stablecoins from becoming robust and competitive – particularly the denial of Federal Reserve master accounts and interest payments, which would allow them to operate like fully reserved narrow banks. He sees both stablecoins and CBDCs as part of ongoing creative destruction – technological progress that relocates liquidity risk and maturity mismatches –, and highlights the inconsistency of paying interest on bank reserves but not on digital cash held by the public, viewing it as a concession to the traditional banking sector.
Garratt (2025) likens stablecoins to digital travellers’ cheques – clearing instruments redeemable at par but not tied to individual account holders. As banks enter the space, redemption frictions and interoperability challenges echo historical issues from the pre-clearinghouse era of cheque processing. He argues that a universal stablecoin clearing system will be crucial for broader adoption, ensuring fungibility and monetary singleness across issuers.
Cecchetti and Schoenholtz (2025) also raise concerns about regulatory gaps, chiefly the absence of capital requirements. They argue that tokenised bank deposits offer a more stable and robust alternative to stablecoins, combining the legal protections of traditional bank deposits with features such as programmable settlement, real-time clearing, and blockchain interoperability. Because they are issued by regulated, FDIC-insured banks with central bank access, tokenised deposits are shielded from many of the structural vulnerabilities that afflict stablecoins.
Tether (USDT) is a key example of the possibilities and vulnerabilities created by stablecoins. Operating outside the traditional banking system, it fills critical roles in blockchain-based asset trading, cross-border payments, and as a dollar substitute in emerging markets. Andolfatto (2025) argues that Tether’s reliance on Cantor Fitzgerald, a US-regulated primary dealer, presents a policy window for oversight and systemic risk mitigation. In particular, US policymakers could require Cantor to act as a fiduciary, using its Federal Reserve master account to tighten reserve management, and applying existing AML/KYC standards.
Finally, the multi-issuer stablecoin model (MISC), where a stablecoin is issued jointly by EU-regulated institutions and third-country entities, presents serious financial stability risks and regulatory challenges. This arrangement, not explicitly foreseen under the MiCA regulation, creates loopholes for regulatory arbitrage, fragmented reserve management, and accountability confusion, particularly during redemption runs or crises. Portes (2025) sees several policy options, including banning MISCs outright, amending MiCA to explicitly regulate cross-jurisdiction co-issuance, or developing global regulatory standards.
Tokenisation, platforms, credit, and decentralised finance
Tokenisation – the digital representation of assets on programmable platforms – has the potential to improve the efficiency and functionality of the financial system. After the tokenisation of money, including central bank money and commercial bank deposits, Frost, Gambacorta, Kosse, and Wierts (2025) expect tokenisation to enhance capital markets – particularly in bond issuance – by reducing costs and improving liquidity. The new opportunities also create risks stemming from legal uncertainty, operational vulnerabilities, governance challenges, and the concentration of multiple functions on single platforms. In the authors’ view, both public and private sectors have roles to play in managing these risks and enabling tokenisation to contribute meaningfully to financial safety and efficiency.
By automating transactions, reducing information frictions, and enhancing liquidity, tokenised money can serve a dual function as both a payment method and a collateral asset for financial contracts. Ozdenoren and Yuan (2025) argue that tokenised money can be a foundational element of future financial infrastructure, that expands the supply of secure and transparent assets and fosters the creation of secondary markets but also generates cybersecurity risks and novel financial vulnerabilities, which need to be monitored and addressed.
Brunnermeier and Payne (2025) outline a trilemma at the heart of new approaches to expanding access to credit through digital payment systems: no arrangement can simultaneously ensure strong enforcement, limit private rent extraction, and preserve user privacy. Three institutional approaches are emerging – BigTech platforms, public options, and regulatory ‘coopetition’ between platforms – each balancing the three conflicting objectives in different ways.
DeFi is transforming financial infrastructure by enabling trading and lending without traditional intermediaries (Huang 2025). DeFi exchanges replace order books, and DeFi lending protocols mimic collateralised finance by letting users borrow against tokenised assets, such as tokenised real estate. As DeFi becomes increasingly intertwined with fiat systems and real assets, the challenge for regulators is to craft oversight that acknowledges decentralisation while mitigating systemic risk.
Finally, the transformations in digital finance have brought a younger, more diverse cohort of retail investors into financial markets, often without sufficient financial literacy. To address this, Tebaldi (2025) proposes a regulatory framework that balances the goals of consumer protection, large-scale participation, and inclusive stakeholder governance. He argues that AI-powered robo-advisory tools offer promise in bridging the education gap at scale. Token issuers should meet governance standards comparable to those common in traditional finance.
Conclusion
The rise of stablecoins, tokenised assets, and DeFi has the potential to boost competition, improve access to credit, deepen liquidity, and reduce information frictions. Yet significant risks remain – from regulatory gaps and low financial literacy around complex and novel financial products to challenges to the key principle of monetary singleness. The digital transformation of finance will open new possibilities, but it will also recast old trade-offs in new forms – and introduce entirely new ones.
References
Andolfatto, D (2025), "Tether and the fragility of unregulated dollar substitutes", in D Nielpelt (ed.), Frontiers of Digital Finance, CEPR Press
Bidder, R (2025), "Singleness of money: Towards a nuanced debate", in D Nielpelt (ed.), Frontiers of Digital Finance, CEPR Press.
Brunnermeier, M K and J Payne (2025), "BigTechs, credit, and digital money", in D Nielpelt (ed.), Frontiers of Digital Finance, CEPR Press.
Cecchetti, S G and K L Schoenholtz (2025), "Are stablecoins really the future of payments?", in D Nielpelt (ed.), Frontiers of Digital Finance, CEPR Press.
Chiu, J and C Monnet (2025), "Programmability and uniformity: Rethinking the trade-off in digital currency design", in D Nielpelt (ed.), Frontiers of Digital Finance, CEPR Press.
Frost, J, L Gambacorta, A Kosse and P Wierts (2025), "Tokenisation: The promise and the perils", in D Nielpelt (ed.), Frontiers of Digital Finance, CEPR Press.
Garratt, R (2025), "Banking on blockchain", in D Nielpelt (ed.), Frontiers of Digital Finance, CEPR Press.
Gersbach, H, H van Buggenum, and S Zelzner (2025), "Stablecoins: How research can inform policy", in D Nielpelt (ed.), Frontiers of Digital Finance, CEPR Press.
Huang, W (2025), "Trading and lending in decentralised finance", in D Nielpelt (ed.), Frontiers of Digital Finance, CEPR Press.
Nielpelt, D (ed.) (2025), Frontiers of Digital Finance, CEPR Press.
Ozdenoren, E and K Yuan (2025), "The rise of tokenised money: Building the digital future of financial infrastructure", in D Nielpelt (ed.), Frontiers of Digital Finance, CEPR Press.
Portes, R (2025), "Multi-issuer stablecoins: A threat to financial stability", in D Nielpelt (ed.), Frontiers of Digital Finance, CEPR Press.
Tebaldi, C (2025), "Retail trading in the era of digital finance: Risks, opportunities, and the need for policy innovation", in D Nielpelt (ed.), Frontiers of Digital Finance, CEPR Press.
Uhlig, H (2025), "Stablecoins, central bank digital currencies, and policy", in D Nielpelt (ed.), Frontiers of Digital Finance, CEPR Press.