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During Jerome Powell’s U.S. Senate confirmation hearing on Jan. 11, Senator Patrick Toomey posed a question to current and future Fed chairmen: “If Congress authorizes and the Fed pursues a central bank digital dollar, is there any What would prevent a well-regulated privately issued stablecoin from coexisting with a central bank digital dollar?”
“No. Not at all,” replied the central banker — a response that undoubtedly brought some relief to the crypto community. At least the Fed is not trying to ban stablecoins. The bullet was apparently dodged.
However, Toomey raises an important and enduring question: Can stablecoins and a Fed digital dollar really coexist? Why do people even need stablecoins if individual Americans have retail accounts with the Federal Reserve – as Toomey assumes in a potentially exaggerated case – “the Fed becomes America’s retail banker”? Or a traditional retail bank?
In fact, in a discussion paper released on January 20, The Fed lists various potential risks associated with a digital dollar, including that CBDC can effectively replace funds from commercial banks. The document was intended for public comment, while the Fed said elsewhere that it had no interest in launching a digital currency despite efforts from other countries such as China.
Not everyone agrees that the two can coexist. “A widespread and easily accessible digital dollar will weaken the case for privately issued stablecoins,” said Eswar Prasad, a Cornell economics professor and author of the book, the future of money, told Cointelegraph that although “stablecoins issued by large companies are still attractive, especially in these companies’ own business or financial ecosystems.”
Others envision separate and distinct use cases for stablecoins and central bank digital currencies, or CBDCs, which would include a future U.S. dollar digital dollar. “Every case definitely has some different use cases,” Darrell Duffie, Adams Distinguished Professor of Management and Professor of Finance at Stanford Graduate School of Business, told Cointelegraph. “For example, the Fed is unlikely to offer CBDC accounts to a broad range of foreign consumers,” he suggested, suggesting that dollar-pegged stablecoins could be very useful for making cross-border payments and settlements — for real business needs.
different purpose?
In reality, will digital dollars and privately issued stablecoins serve different purposes – or could stablecoins eventually be replaced by CBDCs around the world?
“Stablecoins are different in structure and purpose than most CBDCs,” Matt Higginson, a McKinsey partner and head of McKinsey’s global blockchain and digital assets program, told Cointelegraph. CBDCs are generally designed to improve financial inclusion, reduce the cost of cash, and to some extent track financial transactions (for example, for anti-money laundering purposes). In contrast, stablecoins are tokenized cash pegged to the U.S. dollar and are designed to increase the speed and efficiency of payments. “Their venues are really completely different, so there’s no reason they shouldn’t co-exist,” Higginson said.
Jonas Gross, president of the Digital Euro Association, told Cointelegraph that the digital dollar has nothing to do with technology or efficiency. Like CBDCs in general, it “may be more efficient or stable for processing high-throughput retail transactions, in which case DLT is not required, or where people prefer the safety, robustness and interoperability of central bank-backed currencies sex.”
In contrast, stablecoins “focus on the technical side, enabling efficient payments due to the elimination of intermediaries and novel and innovative business models,” Gross said. The two can find different constituencies and presumably coexist.
Some countries may also prefer to dollarize their economies with U.S. dollar stablecoins, Duffie added. “And, some may be dollarized against the wishes of their central bank.” As Duffie pointed out, not all CBDCs need to be blockchain-based or based on digital ledger technology, further explaining:
“Assuming the CBDC is not based on DLT, we want to leverage smart contracts or other DLT applications, whether wholesale or retail. Stablecoins can play a useful role there.”
Even Prasad doesn’t rule out coexistence: “Stablecoins and central bank digital currencies can be seen as complementary payment mechanisms, even if they might step on each other in that function.”
Have a change of heart?
During his confirmation hearing, Powell appeared to be more crypto friendly than he was in July 2021. Tell Lawmakers: “You don’t need stablecoins; if you have digital U.S. currency, you don’t need cryptocurrencies,” as argument in favor of Fed’s digital dollar. Assuming what it is, what might have prompted this upheaval?
“U.S. institutions such as the Fed and regulators seem to have understood that stablecoins can provide tremendous support for the dollar,” Gross said. why? “The largest stablecoins are all backed by the U.S. dollar,” if they are to strengthen their position in the cryptocurrency space as a means of payment, “which means the dollar’s importance will increase.”
Prasad has another view, as the Fed chair’s more dovish stance on stablecoins may be because “he takes comfort from actions being considered by Congress and various regulators to place such private cryptocurrencies under stricter standards. under supervision.”
Subvert monetary policy?
Crypto commentators have even suggested that popular stablecoins could eventually undercut traditional monetary policy operations. Are they right? “If it’s dollar-denominated and has stability, I don’t think stablecoins will disrupt monetary policy transmission,” Duffie said, adding: “In fact, I would come to the opposite conclusion.”
Prasad differs: “Stablecoins that disrupt the medium-of-exchange function of central bank money could add to the significant uncertainty that already exists in the transmission of monetary policy to economic activity and inflation.”
For his part, Higginson is wrong about the idea that stablecoins could influence monetary policy. He said that “stablecoins are almost fully reserved,” meaning that nearly every tokenized stablecoin USD has a real dollar reserved, further telling Cointelegraph:
“The obvious conclusion is that it doesn’t change monetary policy at all because you’re not changing the supply of dollars in the economy.”
“America’s retail banker?”
Finally, Senator Toomey up A scene during a confirmation hearing in which “individual Americans [would] With retail accounts at the Fed, the Fed becomes America’s retail banker. Both he and Powell agreed that the role would go well beyond the Fed’s “history, expertise, experience or capabilities.” Still, is such a role unthinkable?
“Historically, central banks have stayed away from direct retail relationships,” Higginson told Cointelegraph. “That’s why our commercial banking system exists.” Central banks, for example, rarely issue money directly to consumers.
related: Early Bird: U.S. Lawmakers Invest in Cryptocurrencies and Their Digital Asset Politics
Furthermore, the properties of stablecoins differ from those of most current or projected CBDCs, “because stablecoins are launched with this smart contract capability, making them programmable,” Higginson continued. This opens up possibilities for their use beyond what we think of traditional central bank digital currencies.
However, the idea of ”retail bankers to America” may not be so easily quelled. For example, a recent EY report, Summons the same – indeed, describe A CBDC sees consumer deposits as an “existential threat” to financial services companies, including retail banks. wrote:
“If customers can keep their money in the central bank, they don’t need retail banks, and companies will see their interest rate margins shrink sharply.”
However, nothing is certain. “The President’s Task Force Report on Stablecoins tells us that the path to introducing useful and compliant stablecoins is far from clear,” Duffie concluded. “Legislation may be required, and it’s not an easy or predictable thing to do.”
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