Stablecoins are proliferating — with perhaps some competition and co-existence with central bank digital currencies (CBDCs).
To that end, Circle CEO Jeremy Allaire told Karen Webster that just as the digital offerings themselves have evolved and grown in value, so too will the supervisory relationships that regulators will establish with stablecoin issuers along the way.
It’s been a busy few months for Circle, as the company eyes a public listing via special purpose acquisition company (SPAC) on the U.S. exchanges.
And in a nod toward the sweeping changes coming to the financial sphere, the company has announced its plans to become a full-reserve national digital currency bank.
Allaire said that since the launching of USDC in 2018, the long-term plan was to create a “systemically, important scaled infrastructure — including a payment infrastructure — for a dollar digital currency in the global financial system.”
Regulation is Appropriate
Allaire said the looming regulatory scrutiny is appropriate because “as something like this gets so big naturally — whether you’re the Federal Reserve or the U.S. Treasury Department or other federal level agencies — the question naturally as well is whether this will ultimately be something that’s supervised just like other banking activities.”
As for the push into national (FDIC insured) banking, Circle is eying getting more directly into digital currency-based lending activities and providing a range of custodial services.
A full-reserve model is not only possible, but in fact, desirable, he said. A fully reserved dollar digital currency in that instance is fundamentally held with cash and short-term highly liquid dollar denominated, treasury instruments — enabling lending markets to be built on top of the digital currency itself.
Some academics might speculate that stablecoins will never reach critical mass or compete directly against the CBDCs because regulators won’t allow it. Allaire dismissed that notion, stating that “this is not an academic discussion … this is getting big.”
We’re in the early stages of lending markets, he said, where parties are transacting in digital assets and creditors are borrowing against digital assets. Interest rate markets are forming, in part through centralized intermediaries lending between each other. The reserve model satisfies the requirement that liquidity be in place to back lending and transactions.
“That’s a little bit jarring for people because that’s happening so fast,” Allaire said.
The company also plans to have a Master Account at the Fed, which would enable the firm to move stablecoins on behalf of clients without intermediaries.
At a high level, the digital currencies can find use among those activities because they are clearly operating as payment instruments. Allaire said buyers and sellers are not using the stablecoins to generate investment returns, even though stablecoin deposits can generate high-yield returns to holders as part of a decentralized internet-based credit system.
“And obviously money transmission law applies to these [payment] activities, whether it’s a PayPal balance or a Square balance or a USDC balance,” he said. “… We’re very interested in the safety and soundness and fundamental liquidity of something that’s closer to ‘full’ reserve.”
His view is that regulators will have to get more comfortable around the risk and control environment for digital currencies that can operate on the public internet because of the innovation in financial services that digital assets over public blockchains will support and accelerate.
The “old” frameworks for anti-money laundering (AML) and know your customer (KYC) may not apply — at least in terms of technology — he said, as market infrastructures move toward decentralization, which raises a “major set of challenges.” He said that it will be critical for firms to know they are dealing with compliant individuals or entities. The principles tied to anti-fraud and AML efforts can still be applied, but in a new light, with an eye on advanced technology in the service of establishing identities (tokenization and digital transactions, after all, have helped transform the payments that have traditionally been tied to ACH and wire transfer activities).
As he said, “The exam manuals don’t exist for these new technologies … but when money becomes just like a JPEG file or an MP3 file, progress will come in part due to public blockchains, and society will ultimately benefit.”
Regulations will evolve, he said, telling Webster that for the first time really in a very long time, technology and innovation is hitting the economic system and the financial system in similar ways to how it hit other industries as a result of the internet.