Money Reimagined: United States of Stablecoin

To maintain the dollar's position in the world, the U.S. should follow Randal Quarles’ advice and foster an open, stablecoin-driven money system.

There’s not much nuance in the crypto community’s opinions about regulators. It’s all or nothing. If a policymaker “gets” the value proposition of bitcoin and cryptocurrencies, and if they embrace blockchain technology’s prospects for improving the financial system, the community will shower them with accolades. If not, they’re the enemy. 

This week’s column is about the ramifications of a crypto-friendly speech by Randal Quarles, the Federal Reserve’s vice chair for Supervision. Among other things it has placed him squarely in the first category. 

A couple of housekeeping notices: 

First, with my co-host Sheila Warren on vacation, this and next week’s episodes of the “Money Reimagined” podcast will be lifted from the two CoinDesk TV shows we recorded during CoinDesk’s Consensus virtual conference in late May. Both are about the opportunities and challenges for crypto/blockchain technology to respond to the growing demand among investors and companies that businesses comply with environmental, sustainability and governance (ESG) standards. The format is faster than the regular audio podcast, with multiple short segments. Have a listen after reading the newsletter. 

Second, I, too, will be out over the next two weeks. In my place, CoinDesk Executive Editor Marc Hochstein will write the weekly column while Features Editor Ben Schiller will shepherd the rest of the newsletter.

The stablecoin route to hyper-dollarization

Move over “Crypto Mom” Hester Peirce. The cryptocurrency community has fallen in love with a new U.S. regulator

the Federal Reserve’s vice chair for Supervision, is being hailed by prominent crypto pundits as a manifesto for how the U.S. government could harness the power of cryptocurrency innovation to serve its international interests and establish an even wider “soft power” role for the dollar in the global economy. 

What caught their attention: Quarles’ argument that stablecoins “could encourage [international] use of the dollar by making cross-border payments faster and cheaper, and it potentially could be deployed much faster and with fewer downsides” than a central bank digital currency (CBDC).

Subscribe to daily report on top news and ideas in crypto.

Permissionless innovation

The strongest argument for letting private stablecoin issuers drive the digital dollar’s development is summed up in the opening lines of Quarles’ speech. He cited “America’s centuries-long enthusiasm for novelty,” which he argued has made “America the home of so many of the scientific and practical innovations that have transformed life in the 21st century from that of the 19th.”

Open blockchain platforms will enable far more inventiveness than closed-door CBDCs developed by central banks, which are hardly known as hotbeds of innovation. The reason there’s breakneck innovation in decentralized finance (DeFi) is because it’s a permissionless environment. Developers don’t need the approval of a corporate board to build on a particular platform. And because users can freely move assets around within the DeFi ecosystem, without going through a bank-like intermediary, there’s a fluid movement of value and investment that helps incentivize and drive that innovation.

The question is, how far is the U.S. government willing to go to facilitate this freewheeling innovation? 

If anything, U.S. regulatory trends are moving toward more, not less control. With U.S. blessing requiring they not only apply know-your-customer (KYC) and anti-money laundering (AML) protocols but also track the identity of non-custodial wallet holders who transact with their customers. And while the non-custodial nature of DeFi platforms has left that field somewhat under regulated for the time being, many lawyers believe that tougher rules are coming for DeFi.

More specifically,All this will put sand in the gears of progress. That may be a price worth paying if the regulation truly helps protect financial stability. Too much regulation, however, and we’ll fall short of the promise of enabling regular people to make fast and easy dollar-based payments around the world. 

The ease of stablecoins stems from their bearer instrument character. They are a digital version of cash whose value is self-contained and can be automatically transferred peer to peer. If KYC and AML requirements are layered into those transactions, which would inherently require an entity such as a bank to police them, then the transaction loses that person-to-person feature. As such, stablecoins will essentially take on many of the same constraints that dog the current banking system, where cross-border payments remain expensive and cumbersome for billions of excluded people, especially in the developing world.

A fork in the road

As last week’s newsletter discussed in a different context, the U.S. now faces two alternative paths. 

First, it could follow Quarles’ advice and foster an open, stablecoin-driven system that gives more people around the world access to the dollar as their preferred currency. 

This would be a very different kind of reserve currency model from the current one. It would generate seigniorage for the U.S. government and deliver competitive advantages to U.S. producers. We can think of it as an advance of U.S. “soft power,” against which China’s authoritarian government, which is inevitably pursuing a centrally controlled model for its digital yuan, is powerless to compete. 

There’s a cost to this model, though: Washington would need to give up on some of the “hard power” it currently wields, including the capacity to control movements of money around the world, seize assets and put pressure on its enemies. 

The second alternative is to double down on the current system but in digital form. 

While there are various models for CBDCs, including ones that incorporate some degree of privacy assurance for users, international transactions would almost certainly entail similar bank-based gatekeeping powers as the existing system.

In this case, competition with China would be more of a straightforward head-to-head conflict, with the two countries’ CBDCs competing directly with each other. In that world, there’s no guarantee a digital dollar would outperform a digital yuan. 

What’s it going to be? The Quarles “novelty” manifesto, or the Rosengren crackdown on “new disruptors”?