The protection of existing or the creation of additional market failures, although inefficient on the whole, can be a profitable activity for an individual or for a single group of participants in a financial system. Therefore market imperfections once identified and addressed with appropriate measures are likely to permanently change their form and place and to challenge even the best of existing institutional arrangements time and again. A third imperfection that may affect a financial system is an unsatisfactory level of competition. When saying this I do not refer to perfect competition as described in textbooks but rather have in mind market contestability. Contestability excludes undue pricing power by market participants, the existence of collusion among market participants and barriers to entry. You will certainly agree with me when I say that there is no guaranty or a kind of “natural law” that leads markets to organise themselves according to the requirements of contestability. The free play of market forces is the exception rather than the rule. Economic agents individually benefit from rule bending. In addition, and this is of particular relevance in clearing and settlement, the presence of high fixed costs constitute relevant barriers to entry. From experience we know that these barriers reduce competition or eliminate it all together. In extreme cases we speak of a “natural monopoly” which call for regulation by public authorities. Market imperfections such as asymmetric information, negative externalities or limited competition have shaped the evolution of financial systems everywhere.
Due to their specificities, stablecoins are a novelty in tune with some markets’ needs. In the context of the economy’s digitalisation, the past decades have shown how Fintechs as well as Bigtechs have aimed at taking advantage of the latest advances in web-based technologies, notably blockchain, to provide new payment credit and investment services. Often, they propose to achieve this through the creation of various new assets (coins, tokens, stablecoins, with or without smart contracts). We all have in mind the first generation of crypto-assets such as Bitcoin and Ethereum, initially designed to be instruments of exchange in the digital world but suffering from a number of limitations, not least severe price volatility and a lack of guarantee of their convertibility and security. A second generation is emerging in the form of « stablecoins », such as the JP Morgan Coin, UBS’s Utility Settlement Coin or Facebook’s Libra. They share many of the features of crypto-assets but seek to stabilise the price of the “coin” by various means. They might therefore be more capable of contributing to the enhancement of payment systems, with a potentially global reach, especially those sponsored by large technology or financial firms. In the retail market, stablecoin-based solutions seek to address evolving consumer preferences towards instantaneous, continuous, and standardized payments, as consumers become ever more mobile.