Will Fed Digital Dollar Replace Stablecoins Or Would Both Coexist?

• If Congress were to authorize and the Fed were to pursue a central bank digital dollar, is there anything about that which ought to disqualify a well-regulated privately-issued stablecoin from coexisting with a central bank digital dollar? 

• Sen. Patrick Toomey asked during Jerome Powell’s confirmation hearings in the United States Senate on January 11th. 

• No. Not in the least, the central banker responded, and the crypto world breathed a sigh of relief. At the very least, the Fed has no intention of outlawing stablecoins. That bullet appeared to have been deflected.

Toomey, on the other hand, highlighted an important and lingering question, can stablecoins and a Federal Reserve digital dollar coexist? Why do you need stablecoins if all Americans have retail accounts with the Federal Reserve, as Toomey proposed in what may have been an overblown Scenario, and the Fed becomes the retail lender to America? Or, for that matter, typical retail banks? Indeed, the Fed identified many possible hazards connected with a digital currency in a discussion paper released on January 20, including the possibility that a CBDC may effectively replace commercial bank money. The purpose of that document was to gather public feedback, but the Fed has stated that, despite the efforts of other countries like China, it has no interest in rushing out a digital currency.

Not everyone believed the two could coexist. The case for privately authorized stablecoins might well be undercut by a broadly and easily available digital dollar, Eswar Prasad, professor of economics at Cornell University clarified to some news website, adding that stablecoins released by significant corporations could still have a foothold, specifically within those corporations’ own commercial or financial ecosystems.

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Different Use Cases For Both

Others imagined different and independent use cases for stablecoins and central bank digital currencies, or CBDCS, a category that would include a future digital dollar from the United States. Darrell Duffie, Adams distinguished professor of management and professor of finance at Stanford University’s Graduate School of Business explained to some news website. There are undoubtedly some distinct use cases for each.

In its architecture and purpose, stablecoins are different from most CBDCS, Matt Higginson, a McKinsey partner who oversees the firm’s worldwide blockchain and digital assets projects, explained. CBDCs are usually focused on increasing financial inclusion, lowering the cost of ash, and recording financial transactions to some extent. Stablecoins, on the other hand, are dollar-pegged tokenized cash targeted at increasing payment speed and efficiency. Their premises are really pretty different, Higginson explained, so there’s no reason they shouldn’t coexist. According to Jonas Gross, chairman of the Digital Euro Association, a digital currency isn’t primarily about technology or efficiency.

Stablecoins Could Be A Better Choice

As with CBDCS generally, it might be more better or stable for managing a high throughput of retail transactions, where DLT is not required, or where individuals want the safety, soundness, and interoperability of a central- bank-backed currency more. Stablecoins, in comparison, focuses on the technological aspects, allow efficient payments due to removing intermediaries and novel innovative business models, Gross said. Both of these might find different constituencies and may probably co-exist.

Some countries may also want to dollarize their economies by using a USD stablecoin, according to Duffie. And some may be dolarized against their central banks’ preferences. As Duffie pointed out, not all CBDCS must be built on the blockchain or digital ledger technology. Stablecoins and central bank digital Currencies might be considered as complementing payment methods, even if they might step on each other’s toes in that capacity, Prasad said.

Even so, nothing is certain. “According to the Presidents Working Group Report on Stablecoins, the path to the introduction of usable and compatible stablecoins is far from apparent,” Duffie stated, adding, “Legislation may be required, and that is not a straightforward or predictable thing.”