Jerome Powell: Stablecoins can coexist with the Fed’s CBDC
Federal Reserve Chair Jerome Powell clarified his stance on whether a potential Fed CBDC would preclude the existence of privately-issued stablecoins, to which Powell responded “No, not at all.”
If stablecoins can coexist and compete against a Fed digital dollar, it will have big implications. It would mean that when Fed CBDC launched, it wouldn’t automatically have monopolistic advantages that government-issued fiat typically have in the economy.
Investors might prefer to use a private stablecoin over the Fed’s CBDC, which would massively undermine many traditional monetary policy operations that central banks make use of to manipulate the money supply, control inflation, and modulate economic growth.
Powell’s comment also marks a surprisingly softened regulatory stance against privately-issued stablecoins from back in July 2021, where Powell went as far as to say:
“[Investors] wouldn’t need stablecoins; you wouldn’t need cryptocurrencies if you had a digital U.S. currency.”
In the coming weeks, the Fed is expected to release a much-anticipated report on cryptocurrencies, which should provide clarity around an impending CBDC.
Why are stablecoins targeted?
Stablecoins have very important role in crypto. They serve the purpose of a stable-valued currency that investors use as a “resting point” to buy and sell typically volatile cryptocurrencies, without having to transfer funds into and out of financial institutions that is not only costly, but can take days.
Stablecoin market size has become an increasingly hot topic in finance. At the time of writing, Coinmarketcap lists a total of 73 active stablecoins across fiat-backed, crypto-backed and algorithmic types.
Majority of total stablecoin market cap however, are fiat-backed stablecoins such as Tether’s USDT, Coinbase’s USDC and Binance’s BUSD, consisting of a combined market capitalization of $137 billion. These are also the same stablecoins that have been on regulators’ crosshair due to the decentralized and out-of-reach nature of crypto-backed and algorithmic coins that are run by typically anonymous DeFi developers.
The growing regulatory interest on stablecoins comes out (at least namely) from concerns surrounding its unsecured backing. In theory, stablecoins like USDT are backed 1:1 by a US dollar equivalent. In practice however, Tether’s backings are invested across a variety of financial assets (in a similar manner that banks treat deposits), which has opened questions to the soundness of its asset backing, as they are still unregulated.
However, November report by the US treasury signaled that regulators have a clear intent to bring stablecoins under the regulatory regime of the traditional financial system.
