Stablecoins

Stablecoins Warren E. Weber Global Interdependence Center February 3, 2020

Disclaimer: Views are those of the author, not of the Federal Reserve Bank of Atlanta or the Federal Reserve System

Introduction Satoshi Nakamoto created bitcoin as an “Electronic Cash System” Wide adoption has not occurred – a major reason: price volatility 10,000 USD/BTC 9,000

8,000

7,000

6,000 1-Dec-19

31-Dec-19

30-Jan-20

Introduction

One proposed solution: Stablecoin Native cryptocurrency intended to maintain ≈ 1:1 exchange rate against a sovereign currency

Currently over 50 active initiatives pegged to various sovereign currencies

Most Common Approach Being Used

Fiat-backing: Issuer promises to maintain 100% sovereign currency reserve backing

Most Common Approach Being Used

Fiat-backing: Issuer promises to maintain 100% sovereign currency reserve backing

No fiat-backed stablecoin has taken off so far Tether ($4.1B), USD Coin ($435M), Paxos Standard ($240M), True USD ($157.7 million) USD ($1.8 Trillion)

Most Common Approach Being Used

Fiat-backing: Issuer promises to maintain 100% sovereign currency reserve backing

No fiat-backed stablecoin has taken off so far Tether ($4.1B), USD Coin ($435M), Paxos Standard ($240M), True USD ($157.7 million) USD ($1.8 Trillion)

Reasons: Introducing new private currencies is hard (network effects) Monitoring

Libra

Therefore, not much policy concern about stablecoins until recent wake-up call Facebook proposed setting up Libra, a stablecoin Has sparked great interest in the media and by policymakers Reason: Possibility Libra could be widely used Well-established global presence Physical infrastructure and engineering support to quickly scale up

Policy Concerns:

Possibility of wide-spread use raises important issues for monetary and regulatory policies concerning stablecoins (i) Monetary Policy As no new money created (1:1 with sovereign currencies), may not seem an issue for domestic monetary policy However, if widely replaces sovereign currencies in transactions, could affect country’s ability to carry out monetary policy The less a country’s currency used, the less the effect of changing interest rates in terms of that currency

Policy Concerns

(ii) Financial Stability Likely stablecoin-based financial instruments, institutions and secondary markets will arise Already beginning to happen (DeFi)

Could affect ability to provide deposit insurance or for CB to act as LOLR Reason: CB cannot create new units of a stablecoin

Policy Concerns

(iii) Safety and Efficiency of Payments System Stablecoin will have to exist on a digital ledger If permissioned: trusted third-party issues, just like current system, except ledger not run by a government or central bank If permission-less: issues with forking, scaling, time until transaction considered secure

Possible policy responses:

CBDC or government-issued DC Ban on stablecoins Improved, less bank-oriented payments system Changes in structure of financial regulation

Possible policy responses:

CBDC or government-issued DC Ban on stablecoins Improved, less bank-oriented payments system Changes in structure of financial regulation Conclusion: Much work to be done to find best response to potential challenges