Last week, U.S. Securities and Exchange Commission Chair Gary Gensler made a strong statement: It’s time to regulate cryptocurrency markets. He is not the only regulator who believes this. Jerome Powell, chair of the Federal Reserve, issued an urgent call for regulation of stablecoins — cryptocurrencies that are pegged to a reference asset such as the U.S. dollar — and Federal Reserve Governor Lael Brainard signaled that the case for the Federal Reserve exploring a central bank digital currency (CBDC) in response to stablecoins seems to be getting stronger.
Regulators typically only pay this level of attention to systemically important segments of the financial system, such as banks and money market funds. These statements add to a growing body of evidence that unlike cryptocurrencies like Bitcoin and Ethereum — which widely fluctuate in value — stablecoins have the potential to play an important (if yet to be defined) role in the future of global finance. They could even become a backbone for payments and financial services.
To state the obvious, this means that major changes might be afoot for central banks, regulators, and the financial sector. These changes could bring a host of benefits, but also new and very real risks.
To economists, the benefits of stablecoins include lower-cost, safe, real-time, and more competitive payments compared to what consumers and businesses experience today. They could rapidly make it cheaper for businesses to accept payments and easier for governments to run conditional cash transfer programs (including sending stimulus money). They could connect unbanked or underbanked segments of the population to the financial system. But without robust legal and economic frameworks, there’s a real risk stablecoins would be anything but stable. They could collapse like an unsound currency board, “break the buck” like money market funds in 2008, or spiral into worthlessness. They could replicate the turmoil of the “wildcat” banks of the 19th century.