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The head of the Federal Deposit Insurance Corporation is the latest Biden administration regulator to warn of the potentially destructive impact of cryptocurrencies on the U.S. economy.
Acting FDIC Chairman Martin Gruenberg said Thursday he was particularly concerned about the impact of so-called “payment stablecoins” on the business models of traditional banks.
Stablecoins, like USD Coin
USDCUSD,
and Tether
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are a type of cryptocurrency that aims to maintain a stable value relative to the dollar. They are predominately used by crypto investors as a stable store of value, but many crypto entrepreneurs imagine stablecoins could become popular means of payment for traditional goods and services over the internet.
“The development of a payment stablecoin could fundamentally alter the landscape of banking,” Gruenberg said during a speech at the Brookings Institution. “Economies of scale associated with payment stablecoins could lead to further consolidation in the banking system or disintermediation of traditional banks.”
He added that these stablecoins could encourage businesses and individuals to end their relationships with traditional banks and “potentially create a foundation for a new type of shadow banking,” while posing a particular risk to smaller, community banks.
Gruenberg said there were three features that could make stablecoins “significantly safer” including requiring stablecoins to be issued by a subsidiary of a federally regulated bank, requirements that they be backed by high-quality liquid assets like U.S. government debt
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4.215%
and a requirement that stablecoins be issued by a centralized entity so that compliance with anti-money laundering laws can be assured.
The regulator did concede that there could be benefits that payment stablecoins provide to the economy, “especially to the extent [they] foster an inclusive, real-time payments system,” though he argued that evidence of these benefits is so far lacking.
Gordon Liao, who serves as chief economist at USD Coin issuer Circle, argued in a panel discussion following Gruenberg’s speech that requiring stablecoins to be issued by banks would be a mistake, noting that large banks were at the center of the 2008 financial crisis, in part because of an implicit understanding that the government would bail out these institutions if they took on too much risk.
“By unbundling payment functions from banking…that could pave the way to actually reducing overall financial system risk,” he said.
Lawmakers are paying attention to the stablecoin issue as well, with the top Democrat and Republican on the House Financial Services Committee working together to craft legislation that could set requirements that stablecoins be backed 100% by safe, liquid assets.
Democratic Rep. Jim Himes, who serves on the committee, however, warned at a conference Monday that he doesn’t think a deal will be reached this year on the bill, or even early next year.
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