‘Payment Stable Coins’ Could Lead to ‘Disintermediation of Traditional Banks’, Acting FDIC Chairman Says

In a recent speech, Martin J. Gruenberg, who has served as the Acting Chairman of the Board of the Federal Deposit Insurance Corporation (FDIC) since February 5, 2022, shared his thoughts on “prudential regulation of cryptoassets” .

Here is how Wikipedia describes the FDIC:

The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that provide deposit insurance to depositors at US depository institutions, the other being the National Credit Union Administration, which regulates and insures credit unions. The FDIC is a US government corporation that provides deposit insurance to depositors of US commercial banks and savings banks. The FDIC was created by the Banking Act of 1933, enacted during the Great Depression to restore confidence in the American banking system.

Gruenberg made his comments on “payment stablecoins” on October 20, 2022 during a speech titled “The Prudential Regulation of Crypto-Assets” given at the Brookings Institution:

Unlike Bitcoin, Ether, and similar cryptoassets, most stablecoins are represented as backed by an asset pool or use other methods to help maintain stable value. Currently, the most important stablecoins are supposed to be backed by financial assets such as currencies, US Treasury securities or commercial paper…

Like the concept of money market mutual funds, many types of stablecoins seek to maintain a stable value of one dollar (or other unit of fiat currency) per coin, either by relying on a pool of assets, which could include other digital assets, or through the use of an algorithmic mechanism as a value stabilization mechanism. Of course, what is represented and what is true can be two different things…

Even though crypto-assets and stablecoins have not yet proven to be a significant or reliable source of payment in the real economy, the distributed ledger technology on which they are built may prove to have significant applications and a public utility within the payment system…

There have been many public discussions and debates regarding the benefits and risks associated with the development of a payment stablecoin for domestic and international cross-border payment purposes subject to prudential regulation…

The main benefit of developing a stablecoin payment is the ability to offer cost-effective, real-time, round-the-clock payments for individuals and businesses. Domestically, this is similar to the benefits offered by the Federal Reserve’s FedNow system, which is expected to go live in the coming year. It remains to be seen to what extent a stablecoin payment would provide additional or complementary benefits to the FedNow system…

Nonetheless, it may be worth continuing to examine the potential benefits associated with payout stablecoins. To be clear, I view the notion of payment stablecoins as conceptually distinct and separate from the larger existing universe of stablecoins and designed specifically as an instrument to satisfy the need of consumers and businesses for secure, efficient, cost-effective payments. and in real time…

There are three important features that could make payout stablecoins much more secure than stablecoins currently on the market…

First, payment stablecoins would be safer if they were subject to prudential regulation. One way to ensure prudential regulation and segregation of deposit-taking would be to issue a stablecoin payment through a bank subsidiary…

Second, payout stablecoins would be safer if they were to be backed dollar-for-dollar by high-quality, short-term US Treasury assets. Relying on such high-quality assets would help ensure that payout stablecoins could be exchanged quickly and efficiently for fiat currency on a dollar-for-dollar basis, thereby limiting the risk of the risks associated with these instruments trickling down. on the traditional financial system...




Third, payment stablecoins would be safer if processed on authorized ledger systems with robust governance and compliance mechanisms…

While these three features would make payout stablecoins more secure, there are still several important policy considerations to consider when considering the benefits and risks associated with payout stablecoins…

The development of a payment stablecoin could fundamentally change the banking landscape. The economies of scale associated with payment stablecoins could lead to further consolidation of the banking system or disintermediation of traditional banks.

And the network effects associated with payment stablecoins could change the way credit is granted within the banking system – for example by facilitating greater use of FinTech and non-bank lending – and possibly lead to forms of disintermediation. credit that could damage the viability of many US banks and potentially create the foundations for a new type of shadow banking...

When considering where payment stablecoins should fit into the regulatory landscape, we also need to consider how and to what extent states should charter stablecoin issuers or license them as issuers. silver. Many states have invested considerable time and effort in understanding the risks associated with crypto-assets and stablecoins…

All issuers of payment stablecoins should – just like banks, whether federally or state chartered – be subject to prudential regulation and supervision. As I mentioned, the potential for non-bank stablecoins to disintermediate community banks from their local communities is an issue that should also be carefully explored and considered…

By design, payout stablecoins could have many of the characteristics and potential vulnerabilities associated with money market mutual funds. As we saw earlier, in tight market conditions, large investors could quickly exit their holdings, leading to a sell-off of the underlying securities and panic selling by other investors. This could lead to contagion through other payout stablecoins and similar pooled asset holdings, resulting in a systemic event…

Particular attention should also be paid to issues of disclosure and consumer protection. While the fundamental premise of payout stablecoins is that they can be more secure and easier to understand than more complex crypto-assets, interfacing with retail businesses will pose new questions and challenges as that consumers and businesses will adapt to a new form of payment and its associated rights and obligations…

Disclosure and consumer protection issues will also need to be carefully considered, particularly if custodial wallets are permitted outside the banking system as a means of holding and transacting payment stablecoins. It is unclear whether and to what extent these portfolios would or should be subject to prudential supervision.

Consideration should be given to the ability of a stablecoin payment to foster a more inclusive and accessible banking system. A payment stablecoin and any associated hosted wallets or custodians should be designed in a way that eliminates – not creates – barriers that prevent low- and middle-income households from benefiting from a real-time payment system

As I have indicated before, another important policy consideration should be how a payment system based on the use of payment stablecoins would appropriately interact with the Federal Reserve’s upcoming FedNow service, as well as the development potential for a US central bank digital currency…

Federal banking agencies have considerable authority when it comes to addressing the security, soundness, and financial stability risks associated with crypto-asset-related activities, including perhaps the issuance of payment stablecoins, per our regulated entities…

However, there are clear limits to our authority, particularly in certain areas of consumer protection as well as the provision of wallets and other related services by non-bank entities. We need to consider to what extent legislation would be needed to provide a consistent framework to prudently regulate an “end-to-end” stable payments system and ensure that consumers are appropriately protected in the process.

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About Matthew R. Dailey

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