Despite the criticism that stablecoins and stablecoin issuers have recently faced, including from the highest levels of the US government, there is an opportunity embedded in the continued growth of this industry that can often be overlooked. It is also one of the few issues that tends to garner bipartisan support; the fact that the American banking sector is increasingly uncompetitive and – some would say – an oligopolistic market. Such an arrangement generates several negative implications that include, but are not limited to, 1) fees and surcharges that total tens of billions of dollars, 2) lack of banking options for millions of Americans, and 3) a lack of competition that will put the United States at a disadvantage in the future.
Stablecoins are a rapidly growing and evolving aspect of the crypto-asset ecosystem, but it is important to differentiate the exact type of stablecoin referred to in this context. While on paper stablecoins can be backed or stabilized by anything, the focus of this discussion and current stablecoin payout debate centers on stablecoins that are individually backed by the dollar. American. It may seem that creating a dollar-backed crypto-asset intended to trade/behave like the dollar would be redundant, but that misses the broader points.
Let’s take a look at some of the positive implications that larger stablecoin payouts, especially dollar-backed stablecoins, can create.
Competition for the banking sector. There are certainly risks and other factors that need to be ironed out before the widespread integration of private sector-issued stablecoins or a dollar-backed central bank digital currency. That said, it would be difficult to find an analyst or an institution that could successfully argue that the US banking sector is a hotbed of competition. The five largest US banks have around 40% market share and also tend to skew the “average” bank in terms of assets, staff, etc.
Introducing some competition into stablecoins, even if it takes the form of federally insured and licensed institutions, would embed a healthy dose of competitive forces into the banking industry. People, capital and attention invariably flow into innovative, creative and dynamic organizations, and with these resources also come new ideas. Instead of top-down regulation, which rarely has the desired effect, free market competition is the secret sauce for increasing competition in banking.
Increased accessibility. A recurring fact and position that is regularly mentioned in hearings on a bipartisan basis is the damage that can be caused by bank charges, surcharges and unequal access to banking services. One question that has rightly been asked is how do we reduce income inequality if large numbers of Americans are excluded from banking and related services?
The shift to online banking, an inevitable part of the digitalization trend that is sweeping all aspects of economic and personal life, has resulted in so-called “banking deserts”. Banking deserts are defined as census tracts where there are no bank branches within 10 miles of that tract. According to studies conducted by the Federal Reserve of New York, these banking deserts tend to impact underserved communities, rural communities, and older populations. Combined with unequal access to high-speed internet, this creates a difficult-to-break cycle of inadequate access to modern financial services. Crypto transactions have a proven track record of improving accessibility, increasing transparency, enabling cheaper transactions, and democratizing access to the financial system.
Stablecoin transactions, especially as there is greater clarity around regulatory treatment, can play an important role in reducing these existing inequalities.
Cryptodollars are the future. During the February 2022 stablecoin hearings, an underlying theme was that the rise of crypto-based transactions is all but assured. With CBDCs rapidly entering the market, evidenced by the continued integration of E-CNY into the Chinese economy, the proverbial race is on to develop the currency and payment mechanisms of the future. The efforts of the Boston Federal Reserve and MIT should be seen as a positive step in this direction, but are only the first steps in what is sure to be a long process.
A long process, but a process that must be elevated to the rank of political priority. The singular economic advantage that the United States possesses, objectively speaking, over all other nations is the fact that the US dollar serves as a global reserve asset. Such a role is a privilege, not a right; it increasingly looks like currencies that incorporate aspects of blockchain and crypto-assets into their operation will be the preferred currencies of the future.
The same case could be made for the banking sector and the payment systems that underpin these currencies. Banking systems that innovate, evolve and embrace new ways of transacting will outperform those that do not.
Stablecoins are an iteration of crypto-assets that have drawn criticism from virtually every angle. Bitcoin and proponents of more decentralized options decry the centralized nature of stablecoins, and proponents of a US-issued crypto-dollar are not fans of private competition for sovereign currency dominance. These criticisms aside, as difficult as it may be in the current environment, stablecoins have a vital role to play in the payment and banking industries in the future. The only question is whether policy makers will realize these facts soon enough.