- Key insight: If the Federal Reserve wants to keep the U.S. dollar competitive in the 21st century it must move boldly to declare dollar-backed stablecoins equivalent to other forms of money.
- What's at stake: If the Fed does not begin to design a system where stablecoins are easily transferable to tokenized deposits and other forms of money, we risk a system where there is significant uncertainty over the value of a digital dollar.
- Supporting data: The Bank of Korea has launched the experimental Project Hangang, creating a unified ledger that directly connects central bank back digital currencies with other forms of digital money.
This interoperability works through regulations, FDIC insurance, and the payment networks (rails) that exist between banks and the Federal Reserve. All of these different features ensure that a dollar held in one location has the same value as a dollar held in another location and unifies our dollar system.
Recently, with the passage of the Genius Act, a wrench has been thrown into this system. The Genius act makes signification strides to usher in the recognition of new forms of 21st-century digital money including
If the Federal Reserve wants to keep the U.S. dollar competitive in the 21st century (and the dominant currency exchanged around the world) it will need to make the bold move of affirming these new forms of money as truly equal to all other existing mediums of exchange. If the Fed does not unify all of these forms of money, it risks relegating stablecoins to a legal gray area where users of the digital coins will be unsure if their value will hold, will be less likely to use them in cross-border trade, and will overall hinder the expansion of the U.S. dollar abroad (ceding territory to other non-USD stablecoins).
To put this 21st-century currency battle in context, we already see other central banks around the world moving far faster than the Fed to affirm the "moneyness" of their own stablecoins. For instance, last month, the Bank of England took steps to become the first central bank to offer liquidity backstops to qualified stablecoin issuers. This protection gives U.K. stablecoins the same treatment as other bank-created money, and thus gives consumers the certainty that sterling-denominated stablecoins are truly worth one pound sterling.
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The Bank of Korea has launched the experimental Project Hangang, creating a unified ledger that directly connects central bank back digital currencies with other forms of digital money. This project hasn't been rolled out to the public but is a massive step forward to show that all forms of digital money can be connected in one set of rails — thus affirming the equivalence of all different forms of money.
Within the U.S., the current approach to tokenized forms of money is just not sufficient. As it stands, the only true way for a stablecoin issuer to affirm the moneyness of their product is to either get approval from the Office of the Comptroller of the Currency to purchase an existing bank and gain credibility that way, or gain direct access to the Fed payment rails through a "skinny" master account like Kraken was granted recently. This piecemeal approach is neither efficient nor sufficient since it is time-consuming, and leaves all fintech companies in a fragmented ecosystem where no one knows whose stablecoins have true moneyness.
Further, this problem of digital money is soon going to extend beyond just stablecoins and get even more complicated. SEC Chairman Paul Atkins has recently noted that tokenized deposits could be available as soon as next year. The Federal Reserve will need to get ahead of this and affirm the value of all these different digital/tokenized forms of money. If the Fed does not get ahead of the problem and begin to design a system where stablecoins are easily transferable to tokenized deposits and other forms of money, we risk a system where there is significant uncertainty over the value of a digital dollar.
In all, the Federal Reserve needs to begin implementing or at least experimenting with protocols to affirm the moneyness of all digital/tokenized forms of money that are compliant with the Genius Act and other standard regulations. The protocols that are on the table should include unified ledger experimentation, the extension of payment rails to all digital dollars and/or insurance similar to what the Bank of England established. If the Fed does not at least begin to experiment with such interoperability protocols, it risks a fragmented digital dollar network — one where U.S. citizens and international investors cannot fully trust the value of the digital dollar and the U.S. dollar loses the international dominance that it has gained over the last 100 years.
