UK’s Central Bank Wants to Burden DeFi With Regulations
The Bank of England announced on Monday that stablecoin companies should be treated the same way as commercial banks. The move crystalizes the problem governments are faced with – how to properly compete with digital currencies?
Stablecoins or CBDCs?
This decade is brimming with monetary innovations and maneuvers that are difficult to keep up with. Suffice to say, decisions made during this period will echo far into the future. You could even say that a monetary war is brewing between private and governmental actors.
On the latter side of the equation, central banks seek to keep their monetary monopoly by either issuing their own digital currency – CBDC – or use stablecoins as a pre-made digitized solution to interface with the digital world. Because stablecoins are tethered and collateralized to fiat currency, they still rely on central banks for money supply, which is tokenized into stablecoins.
In fact, a CBDC would be nothing but a government issued stablecoin. This is why the Treasury’s Office of the Comptroller of the Currency (OCC) issued a guideline in January 2021, allowing banks to use public blockchains in the same way they use international payments infrastructure like SWIFT or ACH. Likewise, because stablecoins already exist, it remains an open question if some nations will create CBDCs as distinct digital money.
When Randal Quarles, Vice Chairman for Supervision of the Fed, testified last week before the Senate Banking Committee, he noted as much, saying that CBDC implementation in the United States is “very much an open question.” Why that may be the case, Quarles intimated with the following statement:
“In some cases, fintech firms are seeking to operate without banking partners. In some cases, they can operate more cheaply, which can raise inclusion, but raises questions as to how we think about those firms.”
Where Do Monetary Faultlines Lie?
Everything that is currently happening in the financial world regarding CBDCs can be summed up with the following recognition – control over the money supply imparts sovereign power. If a nation doesn’t exert such control, its sovereignty is drastically reduced. After all, the USD serving as the world’s global reserve currency is the source of its global hegemony, with the military bulwarking it.
For example, when Russia last Thursday ditched USD from its National Wealth Fund (NWF), it is an act to remain sovereign as a nation. Likewise is the Chinese digital yuan an effort to prevent dollarization of the Chinese economy. However, with cryptocurrencies and stablecoins entering the scene, the monetary battlefield becomes more complex.
When Quarles said that companies who operate without banking partners must be viewed differently, he refers to their potential to reduce the sovereign status of nations, i.e., their respective central banks. This has also been revealed in the ECB’s annual report. Then, we are left with the following monetary faultlines:
- CBDCs – directly affirm monetary sovereignty.
- Stablecoins – present a conundrum because they are issued by private companies. How to rein them in?
- Cryptocurrencies – erode monetary sovereignty as decentralized, pseudonymous or anonymous digital assets.
Facebook’s former Libra, now Diem project, is a private stablecoin that faced stiff regulatory backlash because it represented a powerful market actor that exceeds central banks. After all, Facebook has 2.85 billion users, far more than any single country on the planet. Although Libra/Diem would be pegged to the USD, it would be Facebook and its partners that would be issuing the Diem Dollar.
By having control of it, they would gain a treasure trove of market data as the digital surveillance coins circulate through the economy. In turn, although technically a servant of the Fed’s money supply, Facebook’s sovereign status would surpass the Fed’s. This is why stablecoins present a conundrum for the governments and their central banks, and why Facebook’s stablecoin attempt received such tough regulatory opposition.
When it comes to cryptocurrencies as the true threat to the central bank’s sovereign status, their treatment will depend on the specifics. For instance, Bitcoin has moved away from being a cost-effective payment method and has become a reserve asset. As such, some countries will either ban it, like China, while other, smaller countries, will try to adopt it as an economic booster.
The Bank of England Aims to Put Stablecoin Issuers Under Its Control
All the monetary news coming in the next few years will revolve around the faultlines between CBDCs, stablecoins, and cryptocurrencies. The most recent one comes from the Bank of England. Now that you understand the monetary sovereignty powerplay, it will be easy to translate what certain vague statements mean. Such is the case with the BoE’s governor Andrew Bailey, who announced that stablecoin issuers must receive the same regulatory requirements as commercial banks.
“We live in an increasingly digitalised world where the way we make payments and use money is changing rapidly. The prospect of stablecoins as a means of payment and the emerging propositions of CBDC have generated a host of issues that central banks, governments, and society as a whole, need to carefully consider and address. It is essential that we ask the difficult and pertinent questions when it comes to the future of these new forms of digital money.”
Of course, commercial banks are entirely subservient to their respective central banks, which is why hundreds of them have begun charging negative interest rates for depositing money across Europe. If stablecoin issuers were to become akin to commercial banks, this would place them firmly under central bank’s sovereignty.
This way, controllable, well-regulated stablecoins will affirm the central bank’s sovereign status. However, such a process will likely be on a case-by-case basis. We have seen this play out in action before. For example, payment processor Visa withdrew from the Libra stablecoin project, but announced USDC stablecoin payments this March.
USDC is owned by Circle, Coinbase, and Bitman mining company. Their specialized status makes them much less threatening than the overly ambitious Libra/Diem which would be pluggable into a billions-strong, global social network.
Notwithstanding joke coins like DOGE, which crypto has the best chance to become the go-to, daily unit of exchange? Let us know in the comments below.