Last week, U.S. Securities and Exchange Commission Chair Gary Gensler made a strong statement: It’s time to regulate cryptocurrency markets. He is not the only regulator who believes this. Jerome Powell, chair of the Federal Reserve, issued an urgent call for regulation of stablecoins — cryptocurrencies that are pegged to a reference asset such as the U.S. dollar — and Federal Reserve Governor Lael Brainard signaled that the case for the Federal Reserve exploring a central bank digital currency (CBDC) in response to stablecoins seems to be getting stronger.
Stablecoins and the Future of Money
The writing is on the wall: Cryptocurrencies are likely going to play a significant role in the future financial system. The U.S. Federal Reserve has called for a comprehensive regulatory framework for stablecoins and is exploring a central bank digital currency. While a complete overhaul of the system of money is an extremely complex endeavor, there are three measured approaches — different, but not incompatible — that have serious potential: 1) true stablecoins, which are non-interest bearing coins designed to have stable value against a reference currency; 2) demand coins, which are demand deposit claims against insured commercial banks, on blockchain rails; and 3) central bank digital currencies, which are cash on digital rails and could represent the public sector’s response to decreasing demand for physical cash.