Federal Reserve: Circle and Tether Could Dominate the Market, Stablecoins Might "Complement" CBDCs
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Federal Reserve: Circle and Tether Could Dominate the Market, Stablecoins Might "Complement" CBDCs
The three key risks of stablecoins—bank run risk, settlement risk, and systemic risk—need to be specifically addressed, especially given the increasing market concentration among stablecoin issuers.
Navigating Web3 tides with focused insightsBy Jason Brett
Translated by Unitimes
Last Friday, Lael Brainard, a Federal Reserve (Fed) governor nominated by President Biden to serve as the Fed's Vice Chair for Supervision, warned of the rapid growth of stablecoins. Speaking at the 2022 U.S. Monetary Policy Forum in New York on February 18, Brainard predicted that “if current trends continue, the stablecoin market could be dominated by one or two issuers in the future.”
Brainard described an “crypto financial ecosystem”—particularly decentralized finance (DeFi)—driving demand for stablecoins and fueling their rapid expansion. She also cautioned that the prominence of cryptocurrency-related advertisements during the 2022 Super Bowl should signal increased retail investor exposure to stablecoins.
Meanwhile, both the Senate Banking Committee and the House Financial Services Committee have held dedicated hearings on stablecoins over the past two weeks. Brainard herself is awaiting congressional confirmation of her nomination to the Fed. Her nomination, along with others, appears stalled in the Senate due to disagreements between the White House and Republican senators over one nominee (not Brainard).
The "Risks" of Stablecoins to the Global Economy
Brainard noted that some stablecoin issuers themselves project “…the role of stablecoins in payment systems will expand and they will be widely used in daily domestic and cross-border transactions.” Assuming this future state of the market, Brainard called for regulators to implement “a robust framework regarding the quality and adequacy of reserves, risk management, and governance in the stablecoin market.”
Above: Federal Reserve Governor and President Biden’s nominee for new Vice Chair of the Fed, Lael Brainard, testifies during her Senate Banking Committee nomination hearing on Capitol Hill in Washington, D.C., January 13, 2022. Brainard told the committee that fighting inflation is the central bank’s most important task.
Regarding the possibility of one or two stablecoin issuers dominating the market, data from crypto market intelligence firm Messari shows that the two leading stablecoin issuers are Tether (USDT) and Circle (USDC). These two dollar-pegged stablecoins rank third and fourth respectively in overall cryptocurrency market capitalization (as shown below), with a combined market cap reaching $407 billion.
Above: Market cap rankings of the top four cryptocurrencies according to Messari.io, showing Tether (USDT) and USD Coin (USDC) ranked third and fourth respectively, with a combined market cap of $407 billion.
Brainard stated: “…As of January 2022, the largest stablecoin accounted for nearly half of the [crypto] market, and the top four stablecoins together accounted for nearly 90%.”
The U.S. President’s Working Group on Financial Markets has also outlined risks associated with stablecoins in its recent report. Brainard believes the three key risks highlighted in the report—bank run risk, settlement risk, and systemic risk—must be specifically addressed, especially given increasing concentration in the stablecoin issuer market.
Stablecoins and CBDCs Could Be “Complementary”
Brainard argued that a massive shift from deposits into stablecoins could lead to large-scale redemptions by risk-averse users under stress, potentially disrupting financial stability. Signs suggest the Fed’s analysis may indicate stablecoins will persist in future market conditions. Brainard believes “CBDCs (central bank digital currencies) coexisting with stablecoins and commercial bank money could prove complementary by providing safe central bank liabilities within the digital financial ecosystem—just as cash and commercial bank money coexist today.”
Brainard stated that amid the rapid growth of new digital financial market ecosystems, the primary objective of a CBDC (central bank digital currency) should be to ensure the public has continued access to government-issued, risk-free money in the digital financial system. If properly designed, Brainard believes CBDCs could be highly attractive as both a store of value and a means of payment, given their status as the safest form of money.
New Stablecoin Legislation Underway on Capitol Hill
Following stablecoin hearings in both the U.S. House and Senate, Congressman Josh Gottheimer (D-NJ) released a discussion draft of stablecoin legislation. According to a press release from his office, the bill could “help reduce the risk of financial instability, protect consumers, and support America’s ongoing financial technology innovation.”
Above: On February 9, 2022, Representative Josh Gottheimer speaks at a press conference on Capitol Hill in Washington, D.C., discussing rising national crime rates. Recent data shows that the U.S. murder rate rose 30% and violent crime increased by 5% from 2019 to 2020.
Recently, stablecoin issuer Circle (USDC) announced it had issued $50 billion worth of USDC as of January 31, 2022. Dante Disparte, the company’s Chief Strategy Officer and Head of Global Policy, said in a statement included in the congressman’s press release: “We welcome leadership from Congressman Josh Gottheimer, who has taken a thoughtful, risk-based approach to stablecoin innovation in America and how stablecoins can fit within a federal regulatory framework.”
Kristin Smith, Executive Director of the Blockchain Association, and Teana Baker Taylor, Chief Policy Officer of the Chamber of Digital Commerce, both expressed support for the bill proposed by Congressman Josh Gottheimer, as well as for lawmakers’ active engagement with industry stakeholders during the legislative process.
Smith said: “Congressman Josh Gottheimer’s bill is the most comprehensive and thoughtfully crafted stablecoin legislation we’ve seen to date. We’re pleased Congress has taken a proactive approach engaging with industry and government stakeholders as they consider the best path forward for stablecoin regulation. We thank Congressman Gottheimer for his leadership in this space and look forward to continuing to work with him on these issues.”
Taylor added: “The Chamber of Digital Commerce appreciates Congressman Josh Gottheimer’s active consultations with the industry and looks forward to continuing to work with Mr. Gottheimer and other members to build an appropriate regulatory framework, establish proper safeguards, maintain innovation, and provide a level playing field for established stablecoin arrangements and new entrants in this evolving market.”
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