For stablecoins, for cryptos in general, legitimacy comes with broader access within financial services. Greater access to payment rails and infrastructure means that the digital coins can reach a broader audience. Compliance with regulations — along with a chance to help shape those regulations — can foster a sense of trust throughout the payments ecosystem, especially on the part of enterprises and consumers.
To that end, as reported this week, Circle, which is the firm behind the USD Coin, said via blog post that it would look to become a national, digital currency bank.
In reference to the regulatory shift, we note any digital bank (Circle’s envisioned one included) would be moved into the regulatory oversight of a veritable alphabet soup of agencies, including the U.S. Treasury, the FDIC and the Office of the Comptroller of the Currency (OCC), among others.
It is this last one, we contend, that holds particular interest. As noted in this space earlier in the month, the OCC will likely be getting new leadership, nominated by the Biden administration.
And the front runner, Cornell banking law professor Saule Omarova, has said in her writings that “from the states’ perspective, a federal fintech charter presents a competitive threat, especially since several states already offer specialized licenses for cryptocurrency exchanges and other fintech firms offering cryptocurrency services. In addition, she noted, a launch of Diem, a stablecoin (in the same class of cryptos as USDC) would open central banks’ balance sheets to a number of tech firms.
Those statements hint at some of the regulatory issues that would be front and center on the path toward the creation of a fully-digital reserve bank. Supervision at a national level brings with it the issues of connection and access — in this case, access to Federal Reserve payment systems — and mandates on liquidity and reserves (Circle has stated explicitly that it intends to become a full-reserve, federally-chartered bank).
Circle said in its blog post that “… a new global economic system could be built on an internet-native foundation — open, global and interoperable public internet infrastructure for the storage and transmission of value, and ultimately for the intermediation of capital more broadly.”
SEC Filing Points To The Path Forward
In an S-4 filed this month with the Securities and Exchange Commission, tied to the special purpose acquisition company (SPAC) combination with Concord Acquisition Corp., Circle said that “we compete with traditional banks for many of the services we offer. Because we do not currently control a bank or a bank holding company, we are subject to regulation by a variety of state and federal regulators across our products and services and we rely on third-party banks to provide banking services to our customers.”
Later in the filing, the company noted that “as part of our strategy to reduce our dependence on third parties, we may in the future consider pursuing a U.S. national bank charter or evaluate the acquisition of a national bank. This would allow us to access the Federal Reserve System directly, reducing the costs and time for settling transactions.”
Accessing the Fed payments system directly seems to be a hot topic as of late. In an interview with Karen Webster, Reserve Trust CEO Dave Wright — whose firm has a master account with the Fed, the first non-bank with that status — said that connectivity with Fed rails fills a gap that has bedeviled FinTechs for over a decade as banks de-risked their balance sheets and turned their attention to areas other than B2B services. Helping FinTechs get payments completed is relatively lower on the list of priorities.
Also read: API Links FinTechs To Fed Payment Rails
For Circle, too, national bank status, and working with the aforementioned regulatory agencies and the Fed would lend some oversight (and, by extension, a sort of seal of approval) to its reserve activities. With more than $27.5 billion of USDC in circulation, and attestations of dollar-denominated reserves backing USDC, Circle states in its blog post that “establishing national regulatory standards for dollar digital currencies is crucial to enabling the potential of digital currencies in the real economy.” Against that backdrop, the company also maintains that it has been exceeding liquidity coverage and other standards under Basel III, a (voluntary) regulatory framework that oversees capital and liquidity issues.
The ambitions are grand ones — to bring instant payments, stablecoins, and a host of regulatory bodies together. Getting there will be a journey, likely more marathon than sprint.