As more people chase the unregulated crypto market of rising stablecoins, an emerging shadow bank ecosystem threatens community banks’ business models.
Like money market funds that nearly brought down the financial system in 2008, privately operated stablecoins of questionable backing pose their own systemic concerns. With a combined market cap worth $100 billion and growing, the two largest stablecoins—Tether and USDC—lack bank-like rules for transparency, liquidity, and capital.
Introducing a central bank digital currency could be one solution that addresses the heightened risk from these digital assets and undercuts the stablecoin momentum.
Benoit Coeure, the head of the Innovation Hub at the Bank for International Settlements (BIS), recently urged countries to accelerate their CBDC efforts in response to the shifting world of finance. “A CBDC's goal is ultimately to preserve the best elements of our current systems while still allowing a safe space for tomorrow's innovation,” he said. “To do so, central banks have to act while the current system is still in place—and to act now.”
So, where are countries in the development of national digital currencies?
Meanwhile, global accounting firm PwC places the United States 18th in its ranking of CBDC research, development, and production. Critics argue the U.S. lags behind the rest of the world, which has geopolitical and economic implications.
In reality, the U.S. is hardly trailing the rest of the world. The Federal Reserve Bank of Boston began investigating a wholesale CBDC as far back as 2016. The Boston Fed and MIT will soon offer insights into the technical findings from their retail CBDC experimentation.
Separately, the Federal Reserve Board is working to publish a report seeking public input on policy and technical considerations that will cover both CBDC and stablecoins.
The reports are coming at just the right time. As Senate Banking Committee Chairman Sherrod Brown (D-Ohio) has noted, many fintech firms operate on an unlevel playing field without the regulations, consumer protections, and personal relationships of the nation’s community banks.
As private companies move deeper into the digital currency space and rival countries challenge the status of the U.S. dollar, ICBA will represent the community bank perspective, advocating for an infrastructure that preserves the role of financial institutions while preparing them for the future of money.