Here is our pick of the 3 most important stablecoin stories during the week.
Stablecoins or CBDC, do we need both?
This week we heard a lot about the progress of CBDC’s but also people are starting to realise that they will have to compete with their nimble cousins the private company issued stablecoins.
But first, let’s review some of what has already been implemented. The first serious CBDC or otherwise known as the sand dollar, from the Bahama’s central bank, was created ostensibly to deal with financial exclusion. However, Martin C W Walker writes that, even though the currency has been considered a success, the data does not strongly support financial inclusion as a reason for introducing a CBDC.
This paper from the Fed, explores whether there could be a first-mover advantage for a jurisdiction issuing a central bank digital currency (CBDC) compared to other jurisdictions that subsequently issue their own CBDC. Conventional academic literature provides a framework by which one can assess a CBDC in the domestic payments market, the international payments market, and the technology markets that support payments.
However, a CBDC may be more than just a means of payment and thus a first-mover advantage is examined for both the asset component of reserve currency and a future financial system built on CBDCs.
Overall, the first mover literature does not suggest that there is a compelling first-mover advantage for issuing a CBDC.
And finally, Antoine Martin, financial research advisor in the Financial Stability Policy Research Division of the Federal Reserve Bank of New York, speaking about the future of digital currencies and a new path for CBDCs: to support the development of safe stablecoins instead of producing their own digital currency.
“Stablecoins are much better payment instruments than Bitcoin and stabilize their value by being backed by assets denominated in a fiat currency. They commonly depend on commercial bank money to hold the reserve assets that back their coin representations and this is typically the US dollar.
Central bank liabilities could support the provision of stablecoins
“Stablecoins are very close cousins of Alipay and Tenpay’s digital payment platforms in China. Indeed, for every yuan in customer deposits, Alipay and Tenpay must hold a yuan in an account at the People’s Bank of China, making them functionally equivalent to stablecoins”, he continued. “And so in principle, central bank liabilities could support the provision of stablecoins, much like bank reserves for commercial bank money.”
“Instead of issuing a retail CBDC, central banks could support stablecoins by allowing them to be backed one-for-one with balances in a central bank account. They could also facilitate a bankruptcy remote legal structure to ensure that end-users are paid in full even if the issuer becomes bankrupt. Such stablecoins could be a close substitute for central bank digital money, while balances in a central bank account are risk free and could earn interest. Though stablecoin issuers should be subject to some oversight in exchange for access to a central bank account”, he added. “These stablecoins would be safer to end-users and thus more attractive than those backed with other assets. Rather than producing a competitor to digital currencies by producing a CBDC, central banks could be used as a tool by providers to enhance their payment service.
Supporting stablecoins is easier than managing a CBDC for retail use
Antoine Martin concluded by saying that “adapting our regulatory and legislative environment to support stablecoins is already a formidable task, but it is probably easier than managing a CBDC for retail use, especially as the private sector currently provides all retail digital means of payments on legacy technology.”
So in summary, the fastest, easiest and best way to issue a CBDC could be to just properly regulate stablecoins.
Alan Scott is an expert in the FX market and has been working in the domain of stablecoins for many years.
We have a self imposed constraint of 3 news stories per week because we serve busy senior Fintech leaders who just want succinct and important information.