Stablecoins: the Fed’s Newest Existential Threat?

Why stablecoins are more of an existential threat to the Federal Reserve than Bitcoin or cryptocurrencies ever could be.

Let’s start with the elephant in the room: the hilarious banter of presidential candidates who vow they will never let Central Bank Digital Currencies (CBDCs) become a reality only demonstrates their ignorance of the crypto space, undermines their credibility as presidential hopefuls, and fans the fire of the Orwellian book burning zealots who want to outlaw the enormous utility of crypto altogether.

Let’s be honest: There is no privacy threat of CBDCs to the general public because there is categorically no way the central bank is going to issue a retail CBDC. Note the distinction: retail (versus wholesale). If you don’t know the difference, I suggest you stop here and go talk to Chat-GPT about it.

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At IBM we conducted significant research into CBDCs (check the featured documents in my LinkedIn profile). We met with central bank governors from all major continents, and we concluded two things: First, the KYC and AML compliance apparatus that the Fed must assemble to manage retail deposits on the central bank’s balance sheet would likely double the number of federal employees. Second, immediately after launching a retail CBDC there would be an audible nationwide sucking sound as retail deposits flood from commercial bank balance sheets to the Fed’s balance sheet, making all major banks immediately insolvent. You think the failure of Silicon Valley Bank and Silvergate was bad? This would be a comparative Armageddon.

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Stablecoins, on the other hand, are a fascinating phenomenon that has crept up to the front door of the Fed as a new existential threat to the status quo.

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The best stablecoins are those that employ a full reserve model, meaning: every USD token is backed by verifiable bank deposits in the same amount, or by equivalent U.S. treasury reserves. So, in today's higher interest rate environment with an inverted yield curve and treasury rates at their highest in decades, full reserve stablecoin issuers can generate a decent return on deposits that rivals conventional bank spreads, since stablecoins are effectively transferrable non-interest-bearing deposit receipts.

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Anyway, the darling of the industry is Circle which issues the domestic exchange favorite USDC. Circle’s evil twin (according to U.S. regulators and their mages like JPM) is Tether (USDT). Together, USDC and USDT represent the dominant supply of digital dollars on public blockchain networks and exchanges globally.

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While USDC is a trusted instrument on virtually all centralized and decentralized exchanges, USDT has a more checkered past. However, having largely overcome prior concerns regarding the opacity of its reserves, Tether’s past is proving to be a bit of a “bad boy” reputation that might play to its advantage as trust in U.S. fiscal and monetary policies (and foreign policies) become increasingly suspect among the global public— not to mention solvency concerns of the U.S. Treasury’s $34+ trillion national debt.

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Tether is also swinging back, and because Tether is not a U.S. entity it does not directly answer to U.S. regulatory authorities, which means that when Commissioner Gensler or Senator Warren comes calling, the middle finger may be a viable short-term gesture. As long as Tether maintains public confidence through transparency of its USD reserves, it is poised to thrive as the de facto digital dollar on digital asset exchanges around the world, at least until the U.S. regulatory model for crypto un-FUBARs itself.

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Why can’t the Fed just slap them around like they have Ripple and Coinbase by "regulating through enforcement" and sanctioning their domestic bank accounts? Well, probably because Tether is far less dependent upon the U.S. banking system to maintain its reserves. Unless the Treasury is going to stop selling debt to foreign entities (which can’t possibly happen if the U.S. war machine is to continue thriving), then Tether has far less exposure to the schizophrenic crypto policies of the U.S. banking and securities regulators.

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Why should anyone care about this? ?As the trend of tokenizing real-world assets continues to grow, transactions will continue to move to decentralized networks beyond the jurisdiction of U.S. regulators. This will impact tax revenues and cascade into a wide range of other collateral impacts affecting conventional financial markets, possibly even the U.S. influence over global monetary policy; although some might not see that as a bad thing.

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So what's the solution? There’s no quick resolve given the ambiguous hot mess of U.S. regulators on the topic of crypto. The EU and UK are far ahead, and some of the Asian jurisdictions like Singapore and Hong Kong even further. The U.S. needs to get its regulatory act together quickly. At one time the leader in global financial services innovation, now the U.S. has fallen embarrassingly behind. If financial regulators don’t adapt soon, decentralized markets will adapt around us, leaving us in the dust. Either that or more people will start accepting crypto as pseudo-legal tender… and what could possibly go wrong with that?!

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Jesse Lund is a former executive of IBM and Wells Fargo turned entrepreneur, investor, and advisor to banks, crypto startups and incumbents, and regulatory agencies.

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Keywords: Stablecoins, CBDC, Monetary Policy, Cryptocurrency, Banking, USDC, Tether, USDT, Bitcoin

#crypto #defi #stablecoins #usdc #usdt #bitcoin