Federal Reserve chair Jerome Powell has been testifying on Capitol Hill this week, and it’s pretty clear that he is not a fan of digital coins – especially stablecoins.
During a two-day congressional hearing, the Fed chief said the main incentive for the U.S. to launch its own central bank digital currency, or CBDC, would be to eliminate the use case for crypto coins in America.
“You wouldn’t need stablecoins; you wouldn’t need cryptocurrencies, if you had a digital U.S. currency,” Powell said. “I think that’s one of the stronger arguments in its favor.”
Central bankers and U.S. lawmakers have for years bemoaned the rise of stablecoins, a specific subset of cryptocurrencies that have a value pegged to a real-world asset, such as a fiat currency like the U.S. dollar or a commodity like gold.
These nongovernmental digital tokens are increasingly being used in domestic and international transactions, which is scary for central banks because they don’t have a say in how this space is regulated.
“I understand why they fear stablecoins,” said Nic Carter, founding partner at Castle Island Ventures. “I can see why they’d be concerned with a large portion of commercial banking activity flipping over to this largely unregulated world.”
But Powell isn’t necessarily all that keen on the U.S. launching its own digital token either. There are already close to 11,000 cryptocurrencies, so a digital dollar would be entering a very crowded field.
In response to a question Thursday from Senator Pat Toomey, R-Pa., Powell said that he was undecided on whether the benefits of a digital dollar outweigh the costs.
What is clear, however, is that the Fed is done letting stablecoins run amok.
“We have a tradition in this country where the public’s money is held in what is supposed to be a very safe asset,” Powell said.
“That doesn’t exist for stablecoins, and if they’re going to be a significant part of the payments universe…then we need an appropriate framework, which frankly we don’t have.”
Stablecoins vs. CBDC vs. electronic USD
Right now, there are several different types of digital U.S. dollars.
Sitting in commercial bank accounts across the country are electronic U.S. dollars, which are partially backed by reserves, under a system known as fractional-reserve banking. As the name implies, the bank holds in its reserves a fraction of the bank’s deposit liabilities. Transferring this form of money from one bank to another or from one country to another operates on legacy financial rails.
There are also a spate of USD-pegged stablecoins, including Tether and USD Coin. Although critics have questioned whether tether has enough dollar reserves to back its currency, it remains the largest stablecoin on the planet. USD Coin is backed by fully reserved assets, redeemable on a 1:1 basis for U.S. dollars, and governed by Centre, a consortium of regulated financial institutions. It is also relatively easy to use no matter where you are.
Then there’s the hypothetical digital dollar that would be the Fed’s take on a CBDC. This would essentially just be a digital twin of the U.S. dollar: Fully regulated, under a central authority, and with the full faith and backing of the country’s central bank.
“A dollar in CBDC form is a liability of the central bank. The Federal Reserve has to pay you back,” explained Ronit Ghose, who heads FinTech and digital assets for Citi Global Insights.
There are relative benefits and drawbacks of all these forms. But Powell’s contention that CBDCs are a rival to stablecoins misses the larger point of why cryptocurrencies are popular – and it’s not simply because they’re digital.
“[They’re] popular because it’s money that’s independent of politicians and bankers,” said Mati Greenspan, portfolio manager and Quantum Economics founder. “People want the separation of government and money. They clearly don’t get that.”
Some argue that a CBDC in the U.S. would technically be safer than privately issued stablecoins because it would present a direct claim against a central bank, similar to the U.S. dollar.
But many of the people who deal in stablecoins don’t necessarily want safe. They want an easier way of doing business, especially internationally.
“It’s just an alternative payments network, built on top of the commercial bank system,” said Carter. “It’s like open banking on steroids. It is very interoperable, it is relatively transparent, and in theory, you can get faster settlement and faster cross-border settlement, because it’s not encumbered.”
Stablecoins originally emerged to cater to demand for dollar exposure offshore and overseas, according to Carter. Tether, the world’s third-largest cryptocurrency and the biggest of the stablecoins, is primarily transacted outside the U.S.
Alyse Killeen, founder a