Stablecoins and CBDCs: Private Vs. Public Monetary Innovation

A Federal Reserve official praised stablecoins over CBDCs, yesterday. The debate cuts right to role of government in money.

AccessTimeIconJun 29, 2021 at 6:02 p.m. UTC
Updated Sep 14, 2021 at 1:18 p.m. UTC
AccessTimeIconJun 29, 2021 at 6:02 p.m. UTCUpdated Sep 14, 2021 at 1:18 p.m. UTC
AccessTimeIconJun 29, 2021 at 6:02 p.m. UTCUpdated Sep 14, 2021 at 1:18 p.m. UTC

“We do not need to fear stablecoins,” Randal Quarles, vice chairman for supervision at the Federal Reserve, said in a speech yesterday. 

That doesn’t sound like a particularly remarkable statement. Except it came from a Fed official, who might be suspicious about stablecoins but was surprisingly bullish on them. 

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In a statement to the Utah Bankers Association Annual Convention, Quarles said that privately issued stablecoins (or assets typically pegged to fiat currencies underwritten by a bundle of other financial instruments) could help solve some of the inefficiencies and inequalities in the current payments system. He is intrigued by the instantaneous and cross-border settlements offered by a blockchain-based technology. 

Quarles' comments were explicitly framed by the debate over central bank digital currencies (CBDC) and the role of the U.S. government in fostering financial innovation. The big question: Should the U.S. undertake a massive public project to digitize cash – through an alternative consumer deposit infrastructure at the Federal Reserve – or should that be left to the private sector? 

Quarles remains skeptical of CBDCs, which he described as a fad, as do many central bankers. The Fed is researching CBDCs and expects to publish a report about the topic this summer. Several senior Fed officials have raised concerns about the risks that stablecoins – which are now worth in excess of $108 billion – present.

“I read [Quarles’] speech as basically a free market-oriented person making the best case they can to let private actors continue doing what they're doing and to hold off on any public alternative,” Willamette University College of Law professor Rohan Grey said in an email. “That's what links the enthusiasm for stablecoins with the pessimism towards CBDCs, in my opinion.” (Grey has argued for an open-source approach to a digital dollar.)

According to Quarles, CDBCs could put more stress on the U.S. banking system and pose cybersecurity risks. They might also limit competition between banks that benefits consumers. On a practical level, there may be a host of legislative roadblocks and administrative costs to setting one up. These are just a few of his concerns. Crypto pundits have become anxious about CBDC privacy, with some calling them state-mandated spyware. 

Stablecoins are one of the fastest-growing sections of the crypto economy. It’s a financial revolution underway that also raises serious doubts. In Quarles’ own words: 

“Stablecoins are an important development that raises difficult questions. For example, how would widespread adoption of stablecoins affect monetary policy or financial stability? How might stablecoins affect the commercial banking system? Do stablecoins represent a fundamental threat to the government's role in money creation?”

But Quarles’ quickly responded to his own questions: “The Federal Reserve has traditionally supported responsible private-sector innovation.” What's more, he said, “Our existing system involves – indeed depends on – private firms creating money every day.”

Although the analogy isn’t perfect, the rise of stablecoins may end up resembling the explosion of consumer credit cards. Those cash equivalents rapidly entered the market and reshaped the economy. Between 1945 and 1960, consumer credit increased from $2.6 billion to $45 billion, according to the Federal Reserve. In 1970, about a decade after Bank of America mailed the first 60,000 charge cards, it stood at $105 billion. About one in six U.S. families held one, according to the Fed. 

That growth was entirely a form of private-sector money creation, giving families the ability to buy now and pay later. There are many criticisms of this debt-driven system – some even pointed to by Quarles – but it’s impossible to say it wasn’t a revolution. 

Grey’s line is to advocate for strong consumer protections in face of private-sector money creation. He argues that stablecoins should be regulated as deposit takers. Moreover, a large part of the Federal Reserve's mandate has been to limit the efforts of "shadow banks to engage in traditional banking activity without proper regulation."

For him, there is a sense of urgency. “The problem is precisely that stablecoins aren't waiting until those concerns have been addressed, they're in circulation now,” he said. 

Indeed, the money printer has been let out.

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