Most eyes were on Jerome Powell‘s comments about the Federal Reserve‘s battle with inflation, but the United States central bank’s chairman had time to call out Congress for failing to come to terms on stablecoin legislation.
While he didn’t quite say that outright in an interview Thursday (Sept. 8) at the Cato Institute, a libertarian Washington think tank, he did say “we think that something like that which is purporting to be money would need to be appropriately regulated.”
He said the biggest issue, in some ways, is perception.
“If people are going to think something is money, then it needs to actually have the qualities of money,” Powell said. “If it doesn’t, then I don’t think you want to take money and make it into just another consumer product where sometimes it fails and sometimes it’s good.”
“You want it to be guaranteed to be good if the public is going look at it like it was $1,” he added of payments stablecoins. “You want to have clarity, transparency, you want to have full reserves of very liquid high-quality assets and things like that.”
That’s not the same as thwarting innovation, Powell noted.
“We don’t want to be in that place,” he said. “We want to be in favor of innovation, but also appropriate regulation.”
Supporting Regulation
That’s something the stablecoin industry has been coming around to accept, Powell noted.
Circle and Coinbase, which are behind No. 2 stablecoin USDC have certainly made that clear. And top crypto exchange Binance, which doesn’t operate in the U.S. except through a separate company, Binance.US, noted that its No. 3 BUSD stablecoin is issued by Paxos, which is regulated by the New York State Department of Financial Services (NYDFS) via its very tough BitLicense.
Read more: In US First, NY Requires Stablecoins to Be Backed by Cash
Paxos, which has its own, far smaller Pax Dollar (USDP) stablecoin, has been very regulation friendly as well.
The top stablecoin by market cap, USDT, is issued by Tether, which has a more troubled relationship with regulators, having paid a multimillion-dollar settlement to the New York attorney general and Commodity Futures Trading Commission (CFTC) for misstating that its stablecoins were 100% backed by dollars.
It has also received a lot of skepticism over the nature and makeup of its reserves, which were discovered to be more than half commercial paper after a settlement with the New York attorney general. The company said it is closing in on its goal of being 100% backed by cash and treasuries, but a formal audit by a top accounting firm is still months off.
See more: Tether Audit, Promised for 5 Years, Still Months Away, CTO Says
Then there are the algorithmic stablecoins, with non-reserve-backed stability that has been called into serious question since the $48 billion collapse of the terra/LUNA stablecoin in May. Most legislation under discussion would essentially ban them, requiring 100% backing reserves made up of dollars or highly liquid assets like U.S. Treasuries.
Privacy First?
With the Cato Institute asking the questions, attention also turned to the possibility of a U.S. central bank digital currency (CBDC), or digital dollar, and the ability to protect users’ privacy.
Read also: Citing Crypto Threats, ‘Must-Pass’ Bill Would Allow Broader Transaction Bans
While starting with the now-standard disclaimer that the Fed hasn’t reached a conclusion on the need for a digital dollar, Powell said, “You know, we all see what’s happening with the digital RMB,” referring to China’s soon-to-launch CBDC, also called e-CNY.
“We would not want a world in which the government sees, in real time, every money transfer that anyone makes with the CBDC,” Powell said. “That would not be something that would be at all attractive in the American context.”
He also turned to the issue of bank disintermediation — widely feared by banks and their advocacy groups.
See also: Regulators, Banks at Odds Over CBDCs
Emphasizing that the Fed isn’t a partisan institution, Powell largely said that the nation’s central bank would address it fairly, adding it would “carefully and thoroughly analyze the public policy, technological challenges trade, public policy, trade-offs and technological challenges … and prepare the way for hopefully a well-informed decision on whether and when to issue a dollar central bank digital currency.”
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