Learning to Live with Crypto
Learning to live with Crypto, co-written with Andreas Dombret—our second collaboration—and published by the LSE’s Systemic Risk Centre (SRC), lands at a timely moment. In a Financial Times piece this week, Bank of England Governor Andrew Bailey asked, “how do we ensure the link between money (in whatever form) and credit creation as an underpinning for economic activity?” We take up that question—and more.
From “let it burn” to strategic embrace
Post-FTX, supervisors wanted banks far from crypto: if it failed, let it fail alone. That stance has flipped. Washington now treats stablecoins as internet-native dollars, deepening dollar reach and demand for Treasuries. Public aims and private issuance have aligned, recasting stablecoins from nuisance to instrument of statecraft. Like it or not, the world must live with a programmable, offshore extension of the dollar.
Coexistence, not replacement
The realistic end-state isn’t extinction or triumph; it’s coexistence. Permissionless rails (Ethereum, Solana, others) will continue to serve speculation and cross-border flows. Regulated finance will adopt tokenised deposits, tokenised assets, and (in some places) CBDCs to capture automation and instant settlement inside the perimeter. Stablecoin volumes already run in the trillions, with usage spiking when local currencies slip—functionally a retail-heavy, digital eurodollar layer.
Tokenisation is misunderstood
Nomenclature misleads. “Wallets” hold keys, not coins. “Tokens” are ledger identifiers with logic stored on-chain. The real design question isn’t cosmetics but co-location: cash, assets and business logic must share the same programmable substrate to unlock atomic settlement and composability. That is why the BIS’s “Unified Ledger” is a clearer—and better—framing than the catch-all “tokenisation.”
Three risks regulators underweight
1) Concentration.
The cash of crypto is a duopoly: USDT and USDC dominate. Despite both being “dollars,” they are not fungible—each is tied to its own contracts, pools and redemption rules. Network effects risk importing Big-Tech-style platform power into what should be a monetary commons. Bridge hacks and synthetic wrappers add fragility; a wobble in a base pair reverberates system-wide.
2) Dollarisation.
Stablecoins are overwhelmingly dollar-denominated. In emerging markets, they enable stealth dollarisation at smartphone speed, bypassing domestic frameworks and amplifying pro-cyclical shocks. The EU’s MiCA offers a pragmatic template for sophisticated markets: permit dollars, but constrain retail-payment-like use and volumes.
3) The erosion of credit money.
Here is Governor Bailey’s question in practice. Fully reserved stablecoins pull deposits from banks into public-collateral wrappers. That shrinks cheap, stable funding for lending, raising spreads and compressing the money multiplier. What looks like neutral plumbing can hollow out credit creation, the engine of modern economies.
The supervisor’s double bind (outside the U.S.)
Non-U.S. authorities face imported dollarisation, platform power from private money, and deposit flight from domestic banks—without lender-of-last-resort cover for offshore digital dollars. They must defend monetary sovereignty while preserving credit elasticity.
The opportunity: build the better rail
The same technology threatening sovereignty can reinforce it if harnessed well. Tokenised deposits deliver atomic settlement, automated escrow, event-driven payments, and real-time collateral mobility—where the gains come not from faster databases but from disintermediation and programmability.
Enter the BIS Unified Ledger: tokenised central bank money (i.e. wholesale CBDC), tokenised deposits, and tokenised securities sharing one programmable infrastructure. Public authorities supply the safe settlement asset and governance; banks supply intermediation and innovation. This preserves the singleness of money (par convertibility) while delivering crypto-like efficiency without ceding control.
Live experiments—Agorá, Helvetia/Jura, Dunbar, Mariana—point to feasible architectures: permissioned nodes run by supervised institutions; interoperability anchored in central bank money; governance via standards for APIs, permissioning and finality. Internationally, interlinking ledgers will be political work as much as technical work—but tractable within supervisory areas.
Restoring elasticity
Unlike rigid, fully backed stablecoins, tokenised deposits expand and contract with credit demand and central bank backstops. They integrate with lender-of-last-resort and deposit insurance, keeping liquidity elastic rather than frozen at issuance. That is the practical path to answering Bailey’s question: preserve the money-credit link while modernising the rails.
Conclusion: live with, not by, crypto
The strategic die is cast: stablecoins function as an offshore dollar layer; tokenisation is reshaping market design. The task for supervisors is to metabolise the risks—concentration, dollarisation, and the assault on credit money—while seizing the architectural advantage of Unified-Ledger-anchored tokenised deposits. Living with crypto is inevitable. Living by it—ceding money and credit to offshore issuers—is not.