Jerome Powell promotes CBDC digital dollar and warns against stablecoins

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 congressional hearing, the Fed chief said the main push for the United States to launch its own central bank digital currency, or CBDC, would be to eliminate the use case crypto coins in America.

“You wouldn’t need stablecoins; you wouldn’t need cryptocurrencies, if you had a US digital currency,” said Powell. “I think that’s one of the strongest arguments in its favor.”

U.S. central bankers and lawmakers have for years lamented the rise of stablecoins, a specific subset of cryptocurrencies whose value is tied to a real-world asset, like a fiat currency like the U.S. dollar or a commodity. like gold.

These non-government digital tokens are increasingly used in domestic and international transactions, which is frightening for central banks as they have no say in how this space is regulated.

“I understand why they fear stablecoins,” said Nic Carter, founding partner of Castle Island Ventures. “I can see why they would be concerned that a lot of commercial banking is shifting into this largely unregulated world.”

But Powell isn’t necessarily very excited about the United States launching its own digital token, either. There are almost 11,000 cryptocurrencies already in existence, so a digital dollar would enter a very crowded area.

In response to a question Thursday from Sen. Pat Toomey, R-Pa., Powell said he was undecided as to whether the benefits of a digital dollar outweigh the costs.

What is clear, however, is that the Fed is done with letting stablecoins run wild.

“We have a tradition in this country where public money is held in what is supposed to be a very secure asset,” said Powell.

“That doesn’t exist for stablecoins, and if they’re going to be a big part of the payments universe… then we need a suitable framework, which we frankly don’t have.”

Currently, there are several types of digital US dollars.

Electronic US dollars, which are partially reserve-backed, are held in commercial bank accounts across the country, under a system known as fractional reserve banking. As the name suggests, the bank holds in its reserves a fraction of the bank’s deposit liabilities. The transfer of this form of money from one bank to another or from one country to another operates on legacy financial rails.

There is also a series of USD indexed stable coins, including Tether and USD Coin. Although critics have questioned whether Tether has enough dollar reserves to support its currency, it remains the largest stable coin on the planet. USD Coin is backed by fully segregated assets, redeemable on a 1: 1 basis against US dollars, and governed by Center, 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 which would be the Fed’s take on a CBDC. It would essentially be just a digital twin of the US dollar: fully regulated, under central authority, and with the full faith and support of the country’s central bank.

“A dollar in the form of a CBDC is a central bank liability. The Federal Reserve has to pay you back,” said Ronit Ghose, who heads FinTech and Digital Assets for Citi Global Insights.

There are advantages and disadvantages relating to all of these forms. But Powell’s claim that CBDCs are a rival to stablecoins misses why cryptocurrencies are popular – and it’s not just because they’re digital.

“[They’re] popular because it’s money that’s independent of politicians and bankers, ”said Mati Greenspan, portfolio manager and founder of Quantum Economics. “People want government and money separate. They clearly don’t understand this. “

Some argue that a CBDC in the United States would be technically safer than stablecoins issued by the private sector because it would have a direct claim against a central bank, similar to the US dollar.

But a lot of people who deal with stablecoins don’t necessarily want security. They want an easier way to do business, especially internationally.

“It’s just an alternative payment network, built on top of the commercial banking system,” Carter said. “It’s like an open bank 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 crowded. “

Stablecoins initially emerged to meet demand for exposure to the dollar overseas and overseas, according to Carter. Tether, the world’s third largest cryptocurrency and largest stablecoin, is primarily traded outside the United States

Alyse Killeen, founder and managing partner of bitcoin-focused venture capital firm Stillmark, believes the presence of a Fed-issued digital currency does nothing to reduce the value of the cryptocurrency.

“A lot of people recognize the loss of autonomy that occurs when permission to spend is implied in the use of a currency,” says Killeen. “It is a relatively common experience to be prevented from completing a wire transfer, debit card or credit card transaction when the transaction is attempted after bank hours or outside of your spending habits. personal identified by the bank, “she said.

“A digital currency issued by the Fed … would probably endure the same friction as attempting to initiate a transfer on a Sunday.”

There are many reasons the Fed is worried about the rise of stable coins.

On the one hand, there is a fear of losing monetary control.

Facebook plans to launch its own stablecoin, diem, later this year, and if it “succeeds in supplanting central bank money in public wallets, it would be more difficult for the Fed to control the money supply or, more generally, to conduct monetary policy, ”according to Rutgers University economist Michael Bordo.

There is also the issue of the loss of monetary sovereignty.

“If the diem, or even a Chinese CBDC, were accepted by many other countries, the US dollar would lose its dominance,” Bordo continued.

Central banks like the Fed also take issue with the fact that stablecoins appear to be tied to fiat money, even if they are not backed by the sovereign, but rather by financial assets. Ghose says it’s similar to how a money market fund works.

“Stable coins are like watching a dubbed movie – you don’t watch the original movie,” Ghose said.

This is what is really going on in the shoes of the Fed. Decentralized cryptocurrencies like bitcoin don’t claim to be the same as fiat, but “stablecoins can make it look like you’re using something with a fixed value for fiat,” he said.

Carter believes the Fed’s hostility may stem from its own plans for a CBDC, which it can use to instill monetary policy in a more granular and direct manner.

Carter imagines the CBDC as a “programmable voucher that the Fed could control with the turn of knobs, having full visibility and control over monetary speed, expiring your money if not spent within 60 days, wiping out completely unfavorable uses of money – this is the holy grail for central bankers because it gives them full leeway. “

Whether they like it or not, central bankers agree that stablecoins are here to stay.

Data from The Block shows nearly $ 110 billion in total stable coin supply, and it remains on a steep slope.

Unlike his fellow central bankers, Fed Governor Randal Quarles believes there is no need to fear stablecoins. He also doesn’t quite understand the fact that the United States is launching its own central bank-backed digital dollar.

In remarks to the Utah Bankers Association in Sun Valley, Idaho, last June, Quarles argued that stablecoins could, in fact, advance the role of the US dollar internationally.

“A global network of US dollar stablecoins 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 less inconvenience than a CBDC,” he said. he declared.

Provided that certain regulatory issues can be addressed, Quarles argued that “rather than strive to find ways to say ‘no’,” the Fed should say ‘yes’ to these products.

“Indeed, the combination of imminent improvements to the existing payment system such as various instant payments initiatives combined with the cross-border efficiency of properly structured stablecoins may well make any effort to develop a CBDC redundant,” Quarles continued.

President Biden will have to decide in October to renew Quarles’ tenure as vice president of central bank oversight, which could indicate where the White House stands on the subject of digital currencies.