Stablecoins Could Challenge Banks and Drive Down Payment Costs: Federal Reserve Governor

A member of the Board of Governors of the Federal Reserve System is sharing his thoughts on the advantages of using private stablecoins over central bank digital currencies (CBDCs).

In a speech at the American Enterprise Institute in Washington, DC, Governor Christopher J. Waller weighs the benefits of using a privatized digital currency in place of a CBDC.

Waller says that the concept of a CBDC is “a solution in search of a problem.” He argues that a privatized digital dollar could be more effective than a CBDC in a number of ways.

“It seems to me, however, that private-sector innovations might reduce the markup charged by banks more effectively than a CBDC would. If commercial banks are earning rents from their market power, then there is a profit opportunity for nonbanks to enter the payment business and provide the general public with cheaper payment services.

And, indeed, we are currently seeing a surge of nonbanks getting into payments.”

Waller specifically discusses the benefits of stablecoins and how they could potentially minimize markup prices for payment services.

“For example, in recent years, ‘stablecoin’ arrangements have emerged as a particularly important type of nonbank entrant into the payments landscape. Stablecoins are digital assets whose value is tied to one or more other assets, such as a sovereign currency. A stablecoin could serve as an attractive payment instrument if it is pegged one-to-one to the dollar and is backed by a safe and liquid pool of assets.

If one or more stablecoin arrangements can develop a significant user base, they could become a major challenger to banks for processing payments. Importantly, payments using such stablecoins might be ‘free’ in the sense that there would be no fee required to initiate or receive a payment. Accordingly, one can easily imagine that competition from stablecoins could pressure banks to reduce their markup for payment services.”

Waller also addresses concerns about the potential for stablecoins to minimize the primacy of US currency. The governor says that stablecoins could actually help US monetary policy as long as they are pegged to the dollar.

“Commercial banks and stablecoins pegged to the US dollar act as conduits for US monetary policy and amplify policy actions. So, if anything, private stablecoins pegged to the dollar broaden the reach of US monetary policy rather than diminish it.”

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