Stablecoin issuer: We don’t need a central bank digital currency

·Senior Reporter
·4-min read

U.S.-stablecoin issuer Circle said a central bank digital currency isn’t needed and creates more risks, underscoring that private-sector stablecoins are already achieving what a CBDC would hope to offer.

“Many of the benefits of a CBDC are already being met by private-sector innovations, like USDC, through blockchain-based payment systems," the largest stablecoin issuer in the U.S. said in comments to the Federal Reserve’s discussion paper on a central bank digital currency.

Circle argues its coin, USDC, is regulated, and fully backed by the U.S. dollar and short-term U.S. government bonds, keeping it in parity with the U.S. dollar.

Stablecoins aim to peg their value to a fiat currency to keep their value stable. Circle argues the reserves are held in the custody and control of the U.S.-regulated banking system and issued in compliance with money transmitter requirements. Each month, Circle publishes attestation reports by a third-party accounting firm on the reserve balances backing USDC in circulation.

An illustration picture taken in London on May 8, 2022, shows a gold plated souvenir cryptocurrency Tether (USDT) coin arranged beside a screen displaying US dollar notes. - Tether (USDT) is an Ethereum token known as a stablecoin that is pegged to the value of the US dollar, and is currently the largest stablecoin with a market value of USD 83 billion dollars. (Photo by Justin TALLIS / AFP) (Photo by JUSTIN TALLIS/AFP via Getty Images)
An illustration picture taken in London on May 8, 2022, shows a gold plated souvenir cryptocurrency Tether (USDT) coin arranged beside a screen displaying US dollar notes. - Tether (USDT) is an Ethereum token known as a stablecoin that is pegged to the value of the US dollar, and is currently the largest stablecoin with a market value of USD 83 billion dollars. (Photo by Justin TALLIS / AFP) (Photo by JUSTIN TALLIS/AFP via Getty Images)

The Fed in January issued a paper exploring pros and cons associated with adopting a CBDC, but did not come to any formal conclusion. The central bank has solicited public comments on the paper and is asking for input on numerous questions. These include whether a CBDC should pay interest, or whether it should limit quantities held by individual users.

The central bank declined to comment on Circle’s comments on the Fed paper.

Circle said it would take years to create a CBDC and that it would not be better than USDC, while also stifling innovation, exacerbating financial inclusion, and threatening the existing banking system and broader economy.

“A CBDC, both in interest bearing and non-interest bearing forms, creates potential domestic flight-to-quality or flight-to-safety problems which could destabilize the two-tiered banking system," Circle said in comments. It is not clear from the Federal Reserve’s discussion paper that a CBDC would avert run risk or other financial stability concerns."

Unlike many who have lauded the potential for CBDCs to increase financial inclusion, Circle argued the opposite, claiming that one-third of unbanked Americans noted a lack of trust in financial institutions, which may not be allayed in an intermediated CBDC system.

“It is possible that because the public’s confidence in government institutions and banks has been declining, a CBDC could make the unbanked or underbanked even less likely to engage with financial institutions,” the company said.

And while many have talked about the benefits of reducing costs, Circle said businesses would have to incur costs to set it up from new back-end settlement processes to customer-facing point-of-sale (POS) systems.

It would take years — not months — to design a CBDC, said Treasury Secretary Janet Yellen. Circle said the U.S. government is not well-situated to develop and maintain the technology required to successfully administer a CBDC.

The Boston Federal Reserve is working with MIT to come up with a design that would ensure privacy and security while still maintaining speed. If a CBDC was launched, researchers say it would need to evolve over time, and the system built must be flexible enough to handle that.

Circle’s comments come after the company ran an ad campaign back in February promoting the features of private stablecoins over a central bank digital currency. The Circle ad took aim at CBDCs that “carry the specter of privacy erosion, making cyber threats and technology upgrades a taxpayer burden, rather than the motive of free-market drive, and well-regulated competition.”

Circle CEO Jeremy Allaire has said that private stablecoins could coexist with CBDCs, as has Fed Chair Jay Powell. On Thursday, Fed Vice Chair Lael Brainard is testifyinng on a central bank digital currency before the House Financial Services Committee.

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Jennifer Schonberger covers cryptocurrencies and policy for Yahoo Finance. Follow her at @Jenniferisms.

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