Federal Reserve Chairman Jerome Powell testified on Capitol Hill this week, and it’s pretty clear he’s not a fan of digital coins – especially stablecoins.
During a two-day hearing in Congress, the Fed chief said the main incentive for the US to launch its own central bank digital currency (CBDC) would be to eliminate the crypto coin use case in America.
“You wouldn’t need stablecoins; you wouldn’t need cryptocurrencies if you had US digital currency,” Powell said. “I think that’s one of the stronger arguments for it.”
Central bankers and U.S. lawmakers have been lamenting the rise of stablecoins, a specific subset of cryptocurrencies whose value is tied to a real asset like a fiat currency like the US dollar or a commodity like gold, for years.
These nongovernmental digital tokens are increasingly being used in domestic and international transactions, which is scary for central banks as they have no say in regulating this area.
“I understand why they fear stablecoins,” said Nic Carter, founding partner of Castle Island Ventures. “I can understand why they are concerned that much of the commercial banking activity is moving into this largely unregulated world.”
But Powell is also not necessarily interested in the US launching its own digital token. There are already nearly 11,000 cryptocurrencies out there, so a digital dollar would enter a very crowded field.
In response to a question from Senator Pat Toomey, R-Pa., Powell replied Thursday that he was undecided whether the benefits of a digital dollar outweigh the costs.
What is clear, however, is that the Fed is done with running stablecoins amok.
“We have a tradition in this country where public money is held in what is supposedly a very safe asset,” Powell said.
“That doesn’t exist for stablecoins, and if they are a significant part of the payments universe … then we need an appropriate framework, which we honestly don’t have.”
Stablecoins vs. CBDC vs. electronic USD
There are currently several types of digital US dollars.
Commercial bank accounts across the country hold electronic US dollars, partially backed by reserves, under a system known as partial reserve banking. As the name suggests, the bank holds a fraction of the bank’s deposit liabilities in its reserves. The transfer of this form of money from one bank to another or from one country to another takes place on old financial lines.
There is also a deluge of USD-linked stablecoins, including Tether and USD Coin. Although critics have questioned whether Tether has enough dollar reserves to support its currency, it remains the largest stablecoin in the world. USD Coin is backed by fully reserved assets, redeemable 1: 1 for US dollars and managed by Center, a consortium of regulated financial institutions. It’s also relatively easy to use no matter where you are.
Then there is the hypothetical digital dollar that would be the Fed assumption of a CBDC. This would be essentially just a digital twin of the US dollar: fully regulated, under a central authority, and with the full trust and support of the country’s central bank.
“A dollar in CBDC form is a central bank liability. The Federal Reserve has to pay you back,” said Ronit Ghose, who heads FinTech and digital assets at Citi Global Insights.
All of these forms have relative advantages and disadvantages. But Powell’s claim that CBDCs are a rival to stablecoins misses the bigger point of why cryptocurrencies are popular – and not just because they’re digital.
“[They’re] popular because it is money that is independent of politicians and bankers, ”said Mati Greenspan, portfolio manager and founder of Quantum Economics. “People want the state and money to be separated. They clearly don’t understand. “
Some argue that a CBDC in the US would be technically more secure than privately issued stablecoins, as it would represent a direct claim on a central bank, similar to the US dollar.
But a lot of the people who trade stablecoins don’t necessarily want to be sure. You want an easier way of doing business, especially internationally.
“It’s just an alternate payment network built on top of the commercial banking system,” Carter said. “It’s like open banking on steroids. It’s very interoperable, it’s relatively transparent, and in theory you can get faster settlement and faster cross-border settlement because it’s not encumbered.”
According to Carter, stablecoins were originally created to meet demand for dollar exposure overseas and abroad. Tether, the third largest cryptocurrency in the world and the largest of the stablecoins, is mainly settled outside of the United States
Alyse Killeen, founder and managing partner of Bitcoin-focused venture company Stillmark, believes the presence of a digital currency issued by the Fed in no way diminishes the value of the cryptocurrency.
“Many people recognize the loss of autonomy that occurs when permission to spend is implicitly associated with the use of a currency,” says Killeen. “It is a fairly common experience that a bank transfer, debit card, or credit card transaction will fail if the transaction is attempted outside of bank opening hours or outside of your personal spending habits identified by the bank,” she said.
“A Fed-issued digital currency … would likely have the same points of friction as trying to initiate a transfer on a Sunday.”
Why stablecoins are scary
There are many reasons for the Fed to be concerned about the rise in stablecoins.
On the one hand, there is concern about losing monetary control.
Facebook plans to launch its own stablecoin, diem, later this year, and if it “succeeded in displacing central bank money in the public purse, it would make it more difficult for the Fed to control or more generally manage the money supply” . Monetary policy, “says Rutgers University economist Michael Bordo.
There is also the problem of dwindling monetary sovereignty.
“If this or even a Chinese CBDC were accepted by many other countries, the US dollar would lose its dominance,” continued Bordo.
Central banks such as the Fed also criticize the fact that stablecoins look as if they are linked to a fiat currency, even though they are not backed by the state but by financial assets. Ghose says it’s similar to a money market fund.
“Stablecoins are like watching a dubbed movie – you don’t watch the original movie,” said Ghose.
That really gets under the Fed’s skin. Decentralized cryptocurrencies like Bitcoin don’t pretend to be the same as fiat, but “Stablecoins can create the impression that you are using something with a fixed value for fiat,” he said.
Carter believes the Fed’s hostility could stem from its own plans for a CBDC, which it can use to make monetary policy more granular and direct.
Carter envisions the CBDC as “a programmable coupon that the Fed could control at the flick of a button, that has complete visibility and control over money speed, that expires your money if not spent within 60 days, and poor use of cash completely eliminated – it is the holy grail for central bankers because it gives them complete discretion. “
Nowhere to go
Like it or not, central bankers agree that stablecoins will stay here.
Data from The Block shows a total stablecoin supply of nearly $ 110 billion, and it remains on a rapid rise.
Unlike his central bank counterparts, Fed Governor Randal Quarles believes there is no need to fear stablecoins. Nor does he really understand that the US is introducing its own central bank-backed digital dollar.
In remarks to the Utah Bankers Association in Sun Valley, Idaho, Quarles argued in June that stablecoins could indeed advance the role of the US dollar internationally.
“A global US dollar stablecoin network could encourage the use of the dollar by making cross-border payments faster and cheaper, and it could potentially be deployed much faster and with fewer drawbacks than a CBDC,” he said.
Assuming certain regulatory issues can be addressed, Quarles argued that “instead of trying to find ways to say ‘no'”, the Fed should say “yes” to these products.
“In fact, the combination of upcoming improvements to the existing payment system such as various instant payment initiatives combined with the cross-border efficiency of properly structured stablecoins could make any effort to develop a CBDC superfluous,” continued Quarles.
President Biden will have to decide in October whether to extend Quarles’ tenure as vice chairman of the central bank, which may indicate where the White House is on digital currency.