Should Stablecoin issuers be regulated like a Bank?

Here is our pick of the 3 most important Stablecoin news stories during the week.

This week has seen Crypto centre stage in Washington as the fight over a tax amendment to the massive Infrastructure bill rages on.  However, rather than focus on the minuta of that as it grinds to some conclusion later this week, I have decided this week to focus on the equally strong push but much quieter fight to regulate stablecoins. 

Firstly, JP Morgan, has warned against the hasty implementation of Central Bank Digital Currencies (CBDC) which by its very nature is a regulated stablecoin. The bank said the creation of a new CBDC based retail loan and payments channels must not come at the cost of the existing financial system. Hasty implementation of the CBDCs in the retail market could “cannibalize” existing financial infrastructure.

The comments came from JP Morgan strategist Josh Younger who called for financial inclusion in the CBDC plan. He said it is possible to have more financial inclusion without the need to alter the existing monetary system.

Younger said if CBDCs become a mainstream form of transaction it could lead to a 20%-30% exodus of funding base from existing commercial banks. Banks utilize the deposited money for funding and offer interest to customers. A sudden move to CBDCs based accounts could disrupt the banking system as it would leave no funds with the commercial bank to offer loan or mortgage services.

Younger proposed a $2,500 cap for CBDC accounts as it would meet the needs of lower-income households without any major impact on the banking system. A majority of American households have less than $1,000 in their checking accounts, thus a $2,500 limit is a safe bet.

JP Morgan Warns Hasty CBDC Implementation Could “Cannibalize” Financial System (coingape.com)

Secondly, from the Economist comes this major article calling for stablecoins to be regulated as Banks (possibly in a narrow sense). 

“Governments have an obligation to fight the deception, tax evasion and money laundering that plagues the crypto world. Police seizures of bitcoin suggest that they are becoming more zealous. The harder issue they must grapple with is whether cryptocurrencies threaten the financial system. Were bitcoin to collapse, our crypto “stress test” suggests that its holders would lose hundreds of billions of dollars but that the fallout would be manageable. Yet there is another danger posed by “stablecoins”, a special type of cryptocurrency that pegs its value to conventional money.

Pledges of stability often lead to financial crises. Because banks offer deposits that are redeemable on demand and superficially riskless, but which are backed by longer-term, less liquid and riskier assets, they are vulnerable to runs. Stablecoins are similar.”

https://www.economist.com/leaders/2021/08/07/why-regulators-should-treat-stablecoins-like-banks

Then, The stablecoin giant Circle announced on Monday it intends to become a “national digital currency bank”—a move that would place it under the direct supervision of the Federal Reserve and various agencies run by the U.S. Treasury Department.

Circle CEO Jeremy Allaire, who announced the move in a blog post, said the shift to full-reserve banking would strengthen its stablecoin USDC, which currently has more than $27.5 billion in circulation.

https://decrypt.co/78059/circle-full-reserve-bank-usdc

So in summary, while Washington does what Washington does, we saw JPM recommend that if a CBDC was really necessary is should be capped to 2,500 USD per person and as Regulators try to figure out what to do with stablecoins, one issuer at least has jumped the gun and moved to be regulated as a Bank. 

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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.

For context on stablecoins please read this introductory interview with Alan “How stablecoins will change our world” and read articles tagged stablecoin in our archives. 

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