Despite the criticism that stablecoins and stablecoin issuers have recently faced, including from the highest levels of the U.S. government, there is an opportunity embedded in the continued growth of this sector that can oftentimes go overlooked. This is also one of the few issues that tends to garner bipartisan support; the fact that the U.S. banking sector is increasingly uncompetitive and – some would say – an oligopolistic marketplace. 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 U.S. at a disadvantage going forward.
Stablecoins are a rapidly growing and evolving aspect of the cryptoasset ecosystem, but it is important to differentiate which exact type of stablecoin is being discussed in this context. While on paper stablecoins can be supported or stabilized by anything, the focus of this discussion and the current stablecoin-payment debate centers around stablecoins backed on a one-to-one basis by the U.S. dollar. It might seem like creating a cryptoasset that is backed by the dollar and 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 greater stablecoin payments, especially stablecoins backed by the dollar, can create.
Competition for the banking sector. There are definitely risks and other factors that need to be ironed out prior to the mainstream integration of either privately issued stablecoins or a dollar backed central bank digital currency. That said, one would be hard pressed to find an analyst or institution that could successfully argue that the U.S. banking sector is a hotbed of competition. The five largest U.S. banks have approximately 40% market share, and also tend to skew the “average” bank in terms of assets, personnel, and the like.Introducing some stablecoin competition, even if it does take the form of institutions that are federally insured and chartered, would integrate a healthy dose of competitive forces into the banking sector. People, capital, and attention invariably flow to innovative, creative, and dynamic organizations, and with these resources also come fresh ideas. Instead of top down regulation, which rarely has the intended effects, free market competition is the secret sauce to increase banking sector competition.
Increased accessibility. A recurring fact and position that is routinely mentioned during hearings on a bipartisan basis is the harm that bank fees, surcharges, and unequal access to banking services can create. A question that has been asked, and rightly so, is how income inequality can be reduced if large numbers of Americans are excluded from the banking system and associated services?
The move to online banking, an inevitable part of the digitization trend sweeping through every aspect 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 a 10-mile radius from that tract. According to studies conducted by the New York Federal Reserve these banking deserts tend to impact underserved communities, rural communities, and elderly populations. When combined with uneven access to broadband internet, this creates a hard-to-break cycle consisting of inadequate access to modern financial services. Crypto transactions have an established track record of increasing accessibility, increasing transparency, allowing cheaper transactions, and democratizing access to the financial system.
Stablecoin transactions, especially as more clarity exists 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 ascension of crypto-based transactions is all but assured. With CBDCs entering the marketplace at an accelerating rate, highlighted by the continued integration of the E-CNY into the Chinese economy, the proverbial race is on to develop the currency and payment mechanisms of the future. Efforts by the Boston Federal Reserve Bank and MIT should be viewed as a positive step in this direction, but are only the first steps in what will assuredly be a long process.