Could Stablecoin Push The Feds To Issue Digital Money?

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By John Wu, CEO of SharesPost Digital Assets Group

Should stablecoins and their corresponding reserves gain enough size and traction, they could challenge the influence of the world’s largest reserve currency in the U.S. dollar

Federal Reserve officials have been cool to cryptocurrencies, which makes the suggestion that the central bank should issue its own digital money even more unlikely.

But the recent emergence of stablecoins may force the feds to rethink the issue.

The value of stablecoin is pegged to a real-world asset, in particular the U.S. dollar. A person can buy a stablecoin for a dollar and then sell it for a dollar, which means the issuer must back the asset with capital reserves. By attaching a stablecoin to the world’s most dominant currency, the cryptocurrency would theoretically avoid the volatility that swept through cryptocurrencies that float on the market like Bitcoin and Ethereum.

Investors have poured about $350 million into stablecoins, including Bain Capital Ventures, Google Ventures, Andreessen Horowitz, and Lightspeed Venture Partners, according to a report by digital wallet Blockchain. Two-thirds of all stablecoins are pegged to the U.S. dollar, the report said.

Stable Report estimates about 120 stablecoin projects currently exist, including the USD Coin (USDC), a collaboration between Circle and cryptocurrency exchange Coinbase.

Linking to and eventually challenging the U.S. dollar

Should stablecoins and their corresponding reserves gain enough size and traction, they could challenge the influence of the world’s largest reserve currency in the U.S. dollar, according to a recent note by crypto research Autonomous NEXT. After all, what’s the difference between a digital coin and the actual dollar itself if the former is pegged to the latter?

If that happens, the feds may need to issue digital dollars to prevent private firms from controlling the currency, even indirectly, the firm said.

“In the case where the reserve becomes so large as to be unbreakable, and where the currency is meaningfully used as a medium of exchange, it becomes a threat” to the dollar, the note said.

“The US sovereign is unlikely to allow private parties to issue and own a digital dollar at scale — though the Treasury may be catalyzed to mint digital dollars as a result.”

It’s highly unlikely the Fed would ever issue a cryptocurrency per se. By definition, cryptocurrencies that run on the Blockchain are decentralized assets so a central bank issuing cryptocurrencies does not make a whole lot of sense.

Fed should adopt electronic money

However, stablecoin or no stablecoin, some scholars think the Federal Reserve should explore the concept of “electronic money.”

The Federal Reserve is not a bank in the sense where ordinary people can open savings and checking accounts. Instead, the Fed is designed to be a “lender of last resort” to private commercial banks in cases of financial crisis. Indeed, the Fed spent billions of dollars to stabilize banks during the onset of the financial crisis in 2007.

In a recent paper published by the Federal Reserve Bank of St. Louis REVIEW journal, two academics from the University of Basel in Switzerland argue that the central bank should directly offer digital money to consumers and companies searching for ways to more efficiently move money without relying on cash or third parties.

“We believe there is great demand for a virtual asset issued by a trusted party that can be used to save outside of the private financial system,” Aleksander Berentsen and Fabian Schar wrote. “Central banks would only need to allow households and firms to open accounts with them, which would allow them to make payments with central bank electronic money instead of commercial bank deposits.”

The researchers argue that such a system would cut administrative costs and make monetary policy more transparent.

Not take anything for granted

If everyone, not just a few mega banks, has “access to electronic central bank money, the interest rate on these accounts would be the lowest rate in the economy,” the paper said. “Central bank electronic money would be the most liquid asset in the economy and holders of such money would face no counterparty risk since a central bank cannot become illiquid.”

The system would also keep private banks honest and perhaps avoid a repeat of the Great Recession, the researchers said. Facing a big competitor in the Federal Reserve, banks will have to offer higher interest rates to consumers to attract deposits or take fewer risks that would place their capital in jeopardy.

What this all means is that the Federal Reserve should not take preeminence of the fiat dollar for granted. Whether prompted by stablecoins or the promise of electronic money, even the most powerful financial institution in the world must stay relevant in a world increasingly influenced by digital currencies and Blockchain technologies.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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