Recent global events have seen the US dollar appreciate to historical highs against other world currencies. As the effects of a strong US dollar begin to come into focus, we step away from the macroeconomic effects of a strong dollar and look at how regulators are preparing themselves to regulate a US dollar that is not represented on the balance sheets of banks, but rather on the blockchain. This week, we dive into how regulators are preparing for the rise of STABLECOINS.
On April 8, 2022, Acting Comptroller of the Currency, Michael Hsu, gave a speech to the Institute of International Economic Law titled “Thoughts on the Architecture of Stablecoins.” The speech focused on two important areas—why stablecoins matter and policy considerations in stablecoin design. It was encouraging to see banking regulatory leadership provide a balanced perspective on the need to responsibly embrace innovation with a policy framework for how to deliver stablecoin services in a safe and sound manner. This blog post is intended to summarize the Acting Comptroller’s remarks and support the views of the Office of the Comptroller of the Currency (OCC) as they relate to stablecoins.
Stablecoin adoption has grown significantly and rests at $180 billion in circulating currency. Cryptocurrency broadly has reached a 2 trillion dollar market cap. Statistics show that 70% of cryptocurrency owners were born after 1980, 56% earn under $50,000 annually, 37% of underbanked individuals own cryptocurrency, 10% of cryptocurrency owners are fully banked, and minority populations are outsized cryptocurrency participants. These statistics demonstrate that cryptocurrency is a significant and growing market and that focusing on consumer protections, just as regulators do in other financial services, is a critical component in the growth of this new economy.
The US dollar is the global reserve currency. This status imparts tremendous economic benefits on the US while simultaneously creating national security interests in protecting the dollar’s global status. To maintain the dollar’s status as the global reserve currency, the dollar must evolve with technological trends, including blockchain-based trade and finance economies. There is no guarantee that blockchain-based economies will survive and thrive, but the US has a strategic national security interest in ensuring that the US dollar is capable of servicing as the currency-of-choice in any digital ecosystem.
Acting Comptroller Hsu also discussed the strength of traditional US banking architecture—namely, the importance of segregating central bank money (bank deposits at Federal Reserve Banks) and commercial liabilities of banks (customer deposits at banks). In effect, we use customer deposits at banks just as we use physical cash—fully fungible. This architecture, combined with the US legal system and large economy, creates an approach superior to all others.
Taken together, these comments were quite positive for the stablecoin industry specifically and the cryptocurrency industry more broadly. This seems to be an acceptance of blockchain technology, but through the lens of (i) maintaining the US dollar’s supremacy as the base currency in blockchain-based trade and finance and (ii) designing a digital dollar.
Acting Comptroller Hsu also provided three policy considerations for the industry, legislators, and regulators to consider when thinking though stablecoin architecture—stability, interoperability, and separability. These policy considerations are critical in designing a stablecoin that will mimic the strength and durability of the current system while unlocking the potential gains in efficiency that stablecoins hold the promise of offering.