Recent inflation shocks, especially post-pandemic, have laid bare the shortcomings in central bank strategies. Former Bank of England Governor, Mervyn King, criticised the Fed and BoE for misjudging inflation dynamics, engaging too deeply in expectation management all the while ignoring underlying monetary theory, according to the Financial Times. Politicisation of monetary policy, seen most starkly in Turkey and Argentina, has driven further instability and eroded the credibility of central banks globally. Central banks have faced growing criticism over the past decade for persistent inflation, unconventional monetary policies as well as failures to anticipate or mitigate crises. Indeed, some argue that the credibility of central banks has been undermined by accommodating fiscal policies, opaque communication and an over-reliance on asset purchases, which have contributed to asset bubbles and inequalities. Often central banks are stuck between a ‘rock and a hard place’. For example, as ainvest.com recently wrote: “The Fed's reluctance to cut rates may seem like a prudent measure against inflation, but it risks creating the very deflationary conditions it seeks to avoid.”
Source: Teamblockchain
Over the last 15 years, central banks have lurched from one extraordinary policy to another, including:· post-2008 QE & zero rates - designed to stabilise markets but they inflated asset bubbles, widened inequality and entrenched moral hazard.
· COVID response - emergency liquidity and fiscal-monetary coordination blurred lines between central banks and treasuries. Whilst it prevented collapse, it fuelled unsustainable debt.
· inflation shock (2021–2023) - after years of low inflation, central bankers misread post-pandemic supply shocks, initially dismissing them as ‘transitory’. The delayed tightening eroded credibility and triggered sharp rate hikes that strained both sovereign and private balance sheets.
Critics argue that central bankers are being reactive rather than strategic - swinging between excess accommodation and sudden tightening. Meanwhile, with many countries, debt levels seem to spiral ever upwards whereby increasing the amount of capital that needs to be used - just meet interest payments let alone payoff the amount being borrowed. Seemingly, rather than embracing new tools to meet the challenges of an ever-increasing digital economy, central banks are wary of blockchain-powered tools. At the 2025 Sintra Central Banker Forum, officials voiced growing alarm over stablecoins encroaching on monetary sovereignty and undermining institutional independence.
Meanwhile, the Bank for International Settlements (BIS) - known as the “central bankers’ central bank” - warns that stablecoins risk destabilising monetary systems, so undermining transparency and fuelling capital flight in emerging markets. In a recent analysis on stablecoins, McKinsey reported on “the ability to clear good funds and settle a payment almost instantly, requiring verification of existing funds and confirmation of sending and receiving entities before a transaction can be initiated. Thanks to digital compliance processes and smart contracts, these payments could be automatically checked for anti–money laundering (AML) and know-your-customer (KYC) issues and screened for sanctioned entities via on-chain analytics services and auto-executing instructions.” Ironically, the BIS and other central bankers argue that stablecoins do not satisfy the singleness of money and lack the “backing” and systemic trust of central banks. These arguments seem strange, given “approximately 97% of all money is created by commercial banks in the form of loans.” Considering 97% of money is based on IOUs from banks to their customers, many countries create money via fractional banking - a banking system whereby banks hold only a small (hence fraction) portion of the money deposited by savers as reserves. That is, when you put money in a bank it is no longer your money and you become a creditor - you are, in effect, now lending the bank money. Hence, the singleness of money begins to break down, because cash in your pocket is essentially an asset (there is no other claim over it) whilst money given to a bank is simply with a promise from the bank that when you need it, you can withdraw it.
Therefore, in order to maintain confidence in the banking system, banks themselves are subject to regulation, capital adequacy controls and, in many jurisdictions, governments have instigated deposit protection/insurance schemes because banks do collapse. This means that depositors receive certain amounts of their cash back in the event of banks running into trouble. In the UK, the depositor protection scheme is called the Financial Services Compensation Scheme (FSCS) and individuals regain up to £85,000. In the EU, there is the EU depositors protection scheme, governed by the Deposit Guarantee Schemes Directive (DGSD) where depositors’ first €100,000 is protected. Meanwhile, in the US, if you deposit your savings in a bank, the US depositor protection scheme is administered by the Federal Deposit Insurance Corporation (FDIC) and protects up to $250,000.
However, if you have digital money solution such as a CDBC or certain stablecoins, 100% of your capital is either secured and backed by the central bank or is in short term government bonds. In essence, holders of such digital money solutions are not trusting commercial banks but are relying on nation states, i.e. for $, the US; for £, the UK; and for €, the EU, etc. Therefore, the counterparty risk for certain digital money options is less, i.e. your money is arguably safer than putting money in a bank. Hence, the statement from the BIS that digital money is riskier than central bank money in many cases is false! But why then, are central bankers so worried? The publication, Atlantic Council, believes: “The growing global use of dollar-based stablecoins is worrying major central banks. They fear that increased dollar-based stablecoin usage will unleash currency substitution effects and drive digital dollarization. The ECB, for example, asserts that a digital euro is “crucial for bolstering European sovereignty” in order to ensure the effective transmission of monetary policy, decrease reliance on US based card payment platforms, and maintain the legal tender nature of the euro. In other words, the ECB increasingly sees itself as competing with privately issued stablecoins backed by the US dollar.”
Certainly, central banks are not being eliminated - but potentially their role is being recontextualised; they still maintain control over base money, act as lenders of last resort and set policy interest rates. Yet stablecoins are diminishing their monopoly on payment systems and reserve demand. Hence, does this mean that stablecoins should be increasingly used in cross-border trade (estimated by the IMF to be worth $1 quadrillion), then central banks could evolve into overseers regulating private monetary systems as opposed to merely issuers? The power dynamic shifts from controlling money supply to regulating the rules of a digital monetary architecture, but central bankers still have control. Paradoxically, blockchain-powered money smart contracts and real time AI powered regulatory oversight offer central banks powerful new tools. Projects exploring tokenised central bank reserves, automated interest payments and programmable liquidity are underway. The BIS’s “next-generation monetary system” concept imagines a world where central bank money, commercial bank deposits and even tokenised assets operate within a shared programmable ledger. Such structures promise real-time monetary policy execution, automated settlement and resilience in liquidity provision therefore enabling central bankers to manage and oversee our increasingly digital economies more effectively.
This article first appeared in Digital Bytes (2nd of September, 2025), a weekly newsletter by Jonny Fry of Team Blockchain.