Banks Can Now Treat Public Blockchains Similarly to SWIFT, ACH
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Banks Can Now Treat Public Blockchains Similarly to SWIFT, ACH

The big question: How will this impact CBDC development and stablecoins?
Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

2021 started with groundbreaking good news for the crypto space. The Treasury’s subdivision, OCC, declared that all financial institutions in the US can use public blockchains for their business needs. On the back of the DeFi boom, this could make stablecoins even more relevant and dominant in the future.

Drastic Change by a Simple OCC Decree

If you were excited about PayPal’s plan to integrate cryptocurrencies into its payment ecosystem, the latest news from the Treasury’s Office of the Comptroller of the Currency (OCC) overshadows it completely. On Monday, the OCC released a letter, interpretative guidelines, allowing national banks to use digital ledger infrastructure – blockchain and stablecoins – as a part of their financial infrastructure of transmitting and receiving money.

Effectively, this means that the blockchain space, alongside its stablecoins, has just been elevated to the same status enjoyed by the outdated SWIFT. Society of Worldwide Interbank Financial Telecommunication – SWIFT – is the world’s financial foundation. Whether you are buying groceries using your contactless VISA or MasterCard, or you receive payments via CashApp or PayPal, it all goes through SWIFT. 

Now, all federally charted banks and federal savings associations can serve as blockchain nodes, directly accessing public blockchains. For both validating and storing payments, they can take advantage of blockchain’s nextgen finance features.

Crypto Space Already Celebrates the OCC Directive

Such a colossal milestone had an instant effect on the crypto market. The two largest cryptocurrencies, Bitcoin (BTC) and Ethereum (ETH), rose by 5% and 12% respectively. The news couldn’t have come at a better time, as Bitcoin was just entering a bearish week. As for Ethereum, the two largest stablecoins, USDT ($21.8 billion market cap) and USDC ($4.3 billion market cap) are Ethereum tokens.

The main crypto lobby group, Blockchain Association, welcomed OCC’s move as groundbreaking:

“The letter states that blockchains have the same status as other global financial networks, such as SWIFT, ACH, and FedWire. This is a giant advance for crypto because it paves the way for these networks to be a formal part of the US financial infrastructure.”

Jeremy Allaire, the CEO of Circle, which manages USDC stablecoin, also praised the decision as a new era of global finance.

“This paves the way for the use of leading dollar digital currencies such as USDC as a mainstream payment medium for all forms of payments and settlement, and helps put the US in a leadership position in embracing the power of public blockchains.”

Practical manifestations of OCC’s decision are yet to be unfolded. No doubt, a whole new range of financial services will be built and offered on the mainstream market. For years, platforms such as Stellar and Ripple dreamed of becoming parallel financial networks. This may no longer be necessary if a hybrid model of stablecoins emerges from this policy shift.

Ripple Misses the Boat  

In the aftermath of the SEC’s lawsuit against Ripple (XRP), the ambitious cryptocurrency dropped to an all-time low. In fact, 26 crypto exchanges have already delisted the asset from their portfolios. Since its launch in 2012, the Ripple company has been aiming to become the holy grail of finance – an infrastructure just like SWIFT.

To some degree, it succeeded in this goal by forming partnerships with over 200 financial institutions across 40 countries. Last year, Ripple consolidated its three payment networks – xCurrent, xRapid and xVia – under a single umbrella of RippleNet. The goal of the network was to making money transfers as fast as information itself. 

Unfortunately, it appears the company may have used XRP as a funding mechanism to make that possible. The SEC lawsuit states that it used its quarterly XRP sales to acquire $1.3 billion through unregistered securities offerings. Even without that regulatory hiccup, the OCC’s ruling existentially threatens Ripple’s model in favor of stablecoins.

CBDCs vs. Stablecoins

Stablecoins followed the blowout of DeFi last year, as DeFi’s total value locked (TVL) went from $1 billion to over $17 billion, from February to December. Accordingly, as stablecoins served as an interface cryptocurrency into DeFi space, they rose in usage. This is most exemplified with USDT, the most popular stablecoin.

Image credit: TradingView, USDT Index Chart

However, as a digital currency, Central Bank Digital Currency (CBDC) also has fungibility – the ability to be individually or fractionally equal to another token. After all, it is this fungibility that makes stablecoins so useful to have, in both crypto trading and DeFi ventures.

Therefore, can CBDC usurp stablecoins just as stablecoins usurped Ripple’s business model? It all depends on what kind of CBDC we are going to get. Thus far, the only real CBDC – China’s digital yuan – does not use public blockchain and is account-based, but only to a degree. Meaning that it is designed to be used as a replacement of cash in circulation, not long-term bank account deposits. 

During the Summer, the debate in the United States still raged whether the CBDC should be account-based or a tokenized dollar. As you can see, the nature of CBDC will make all the difference in how it can be used or interfaced with. With the OCC’s directive, it might be the case that the US financial infrastructure can be perfectly served with the fungibility of stablecoins.

Money delivery mechanisms will become transparent and near-instantaneous. Are you worried that with this transparency comes a loss of privacy? Let us know in the comments below.