Stablecoins & CBDCs Could Co-Exist
Artwork by Milad Fakurian
With CBDCs right around the corner, will stablecoins still play an integral part in the future of cryptocurrencies? As we will explore in this article, the 16th chair of the Federal Reserve Jerome Powell is starting to retract his summer 2021 opinion as the W.E.F. propose a theoretical yet potential bilateral relationship between the two.
What is a Stablecoin?
First, we need to understand what a stablecoin is. More specifically, how it pertains to the realm of cryptocurrencies. A stablecoin, as the name would suggest, is a cryptocurrency that tries to keep its value fixed to the market value of another referenced asset. As of today, the large majority of stablecoins are pegged to the US Dollar. The more known ones are Binance’s BUSD, Coinbase’s USDC, and Tether Coin, or USDT, which is the largest of the three in terms of market cap. These coins play a large role in the day-to-day life of crypto holders and traders as they are the quickest and most accessible way to turn cryptocurrencies into FIAT money, as most exchanges hold one or more variations of them.
What is the Federal Reserve’s Stance on Stablecoins?
In July of last year, Powell told the House Financial on Services Committee that the Digital Dollar project was moving forward. During the same discourse, he emphasized that the implementation of a native U.S. digital dollar/CBDC would completely remove the need for stablecoins and/or other similar cryptocurrencies. As can be expected, this was met with a mixed bag of emotions.
For instance, some argued that much like the US dollar, a digital dollar backed by central banks would technically be a safer asset compared to private stablecoins like USDT and USDC. Others claimed that introducing the digital coin could potentially centralize the crypto market and, due to lack of accessibility, further reduce the adoption of cryptocurrencies around the world.
Many of the same critics also argued that although safety may be a valid concern, plenty of investors still prioritize the ease at which they conduct business internationally over the Fed’s notion of safety. In other words, if such a coin were to be introduced, the known bureaucratic and administrative procedures that apply in today’s payments systems could again apply when trying to trade cryptocurrencies on exchanges. This could potentially have rippling effects downstream which would, again, slow down the very processes that this new technology has been trying to innovate since its inception.
Why has Powell changed his stance on stablecoins?
Last week, Powell softened his regulatory stance on stablecoins in a senate banking committee hearing. When asked if a Federal Reserve CBDC would eliminate the need for stablecoins, Powell responded with ‘’No, not at all’’.
The development comes as no surprise given the rapid growth in stablecoin holdings over the last two years. According to McKinsey, nearly $3 trillion in stablecoins were transacted in the first two quarters of 2021. This was mostly attributed to the rising cryptocurrency trading volumes experienced on exchanges, which, over the past two years have grown at a significant pace. Such an increase has grasped the attention of central banks around the world and shown them the potential for a fully functioning CBDC.
Recently, the World Economic Forum (W.E.F.) commented on the matter claiming that, in conjunction with CBDCs, stablecoins could potentially one day streamline the global payments systems. This statement was further reinforced by the entity in December 2021 when it stated that it was developing frameworks that would enable a more coherent regulatory environment – as the current regulations surrounding these complex technologies were still heavily fragmented.
As stablecoins start to play an increasingly protective role during market fluctuations, the involvement of major institutions like the FED and W.E.F. can be seen as a significant step forward for the development and longevity of the Cryptosphere. This being said, stablecoins still remain a pivotal issue for regulators in the U.S..
The Fed has recently announced plans to release an investigative report on the risks and benefits of CBDCs in the coming weeks. Until then, the notions discussed in this article surrounding CBDCs will have to remain speculative and anticipatory.