Stablecoins have moved into the pole position to replace traditional cryptocurrencies as the digital currency of the future. This development has caught the attention of the central banks, who have been calling for the Fed to immediately implement restrictions and regulations around these new stable digital currencies. Rather than solely relying on centralized banking systems, the Federal Reserve should embrace stablecoins to help democratize financial systems for the unbanked, modernize banking, and facilitate international payment in an increasingly connected world.
As Bitcoin and other traditional cryptocurrencies have evolved in purpose from digital currencies to speculative stocks, stablecoins have garnered increased attention due to their price stability. In contrast to traditional cryptocurrencies, stablecoins are cryptocurrencies that are tied to stable assets like fiat currencies or commodities. The entity establishing the stablecoin puts down fiat currencies or stable commodities as collateral to facilitate the seamless exchange of stablecoins for traditional currency. Stablecoins can then be transferred like traditional cryptocurrencies via public blockchains. This characteristic has resulted in a 40% increase in the stablecoin market since May 2021. One stablecoin backed by Circle and Coinbase, USD Coin, has resulted in a doubling of the company’s market cap in the last 90 days, and Circle has announced that it plans to go public through a multibillion-dollar SPAC merger deal. Threatened by these developments, central banks have lobbied for the Fed to ban the use of stablecoins due to their function as an unregulated, decentralized stable currency.
However, stablecoins may provide an answer to many of America’s spiraling problems with financial inclusion. In a financial climate where digital commerce grew by 44% in the United States last year, the unbanked found themselves largely excluded from that sector. The Federal Reserve estimated in 2019, 14 million unbanked U.S. adults faced digital financial exclusion, primarily because they did not have the minimum funds to open a bank account. This massive exclusion significantly inhibits the Federal Reserve from its central goal of providing all U.S. citizens with a safe and flexible monetary and financial system. The gap can be filled by stablecoins, which can provide the unbanked with an accessible alternative to traditional banking. Cryptocurrency wallets do not require a minimum balance and charge no fees to transfer stablecoins between users of the blockchain. Embracing stablecoins for their aforementioned advantages can play a critical role in helping the unbanked conduct safe and stable digital payments, including them in the contemporary American financial ecosystem.
Furthermore, stablecoins can accelerate the push to modernize the traditional banking system and help transition finance to a platform economy. Stablecoins fall into the larger trend of platform economies displacing traditional corporate firms. Platform economies connecting and facilitating interactions between their users have eliminated inefficiencies across numerous industries in America. As Uber upended the taxi industry and Airbnb revolutionized the rental industry, stablecoins similarly have the opportunity to bring banking into the twenty-first century. Since stablecoin networks essentially function as individual financial platform economies, these networks can represent the next step in consumer finance if led with the proper support and guidance of the Federal Reserve. For the average consumer, stablecoins negate many of the problems associated with traditional banking. While wiring money through traditional banking systems must be effectuated within the perimeters of the banks’ time and logistical constraints, stablecoins offer the speed and ease of 24/7 instantaneous transfer. Moreover, banks typically levy exorbitant fees on wire transfers when compared to stablecoins, which allow money to be transferred free of charge. Stablecoin critics have voiced concerns regarding the stability of the many disparate, privately-held financial platforms, arguing that banks should solely handle money for the Federal Reserve. However, these concerns can be mitigated by instituting an approval process that vets stablecoins and authorizes provision by trusted private providers. By doing so, the Federal Reserve can implement a more flexible monetary system that takes advantage of modern consumer technologies, benefitting the American people with greater efficiency, convenience, and cost-saving.
Finally, the Federal Reserve has an added incentive to work with stablecoins due to their ability to facilitate transparent, international payments. Of the many Americans that could benefit from this are the 45 million immigrants who live in the United States. Transferring money internationally within the current financial system often carries hefty fees and regulations that can be significant sources of stress and anxiety. Introducing more accessible stablecoins can ease those burdens, as well as allow the Federal Reserve to more accurately track and collect data on international remittances. Stablecoin critics have argued that since free and instantaneous cryptocurrency transfers are not limited by country, the current stablecoin system can be used for money laundering and tax evasion. However, rather than aiming to ban stablecoin use in the United States, these concerns should spark the Federal Reserve to seek to properly regulate them with the goal of eliminating such misuse. While there are inherent risks that come with embracing this emerging technology and approach, mitigating those risks via proper U.S. regulation can help usher in a superior international payment system that benefits a significant portion of the U.S. population as well as the U.S. government.
While the Federal Reserve seems reluctant to adopt stablecoins, movement has begun within the organization to make a decision on whether to accept or reject this new technology. U.S. lawmakers have suggested the Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act, an act designed to strictly regulate the industry involving FDIC insurance and Federal Reserve deposits to back up the stablecoin. Other threats to privately-held, decentralized stablecoins include CBDCs or central bank digital currencies. The Federal Reserve has considered implementing a “Digital Dollar” stablecoin to replace private stablecoins. This alternative has drawn fire from both central banks, who argue their profits would be cannibalized by a stablecoin, and cryptocurrency enthusiasts, who claim these regulations would stifle the very purposes of stablecoins in the first place. However, if the Federal Reserve is not quick to create a satisfactory solution, the stablecoin industry may relocate to jurisdictions that embrace it. China has begun looking into setting up its own state-sponsored stablecoin network, and the Bahamas is backing its own digital currencies complete with crypto-friendly regulation.
The future of stablecoins may still be up in the air, waiting to be decided upon by the financial boards of the United States. However, instead of viewing stablecoins as the latest movement for the Federal Reserve to curtail, the Fed should view this new payment system as a chance to renovate. Introducing a safe stablecoin system can bring the unbanked into the contemporary financial system, modernize financial systems as platforms, and ease international payment for the millions of hard-working immigrant workers in the United States. While stablecoins appear to be a problem, now, they just might be the financial solution that tens of millions of people have been yearning for.
