View source for On the Coexistence of Stablecoins and Central Bank Digital Currencies


'''* Article: On the Coexistence of Stablecoins and Central Bank Digital Currencies. By Yuliya Guseva, Sangita Gazi, and Douglas Eakeley. Law and Contemporary Problems, Vol. 87, No. 2, 2024'''

URL = https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4709282


=Abstract=

"Money is not a simple concept. It is a complex construct consisting of public and private elements. A significant portion of it originates from private-sector entities like banks, against which other private parties have contractual claims. This longstanding partnership between public and private institutions in creating and supplying money is deeply embedded in economic history and, arguably, even the Constitution of the United States. Over the centuries, federal law has specified which firms issue the safest private money and, in doing so, placed private banks in a somewhat privileged position. Non-bank financial firms, for example, typically do not have access to the Fed-provided rails of the clearing and settlement system for inter-bank payments and the master accounts at the Fed.

These regulatory fundamentals of the private-public economic partnership are long-standing but imperfect. To name a few issues, banks fail; banks have flaws in their operational coverage and do not serve every part of our economy, with millions of unbanked and underbanked residents in the United States; and the current payment systems exhibit inefficiencies and high costs in transfers, clearing, and settlement. These issues highlight that the public-private money system and its regulatory framing are not ideal, militating in favor of reform.

The traditional avenue for improving efficiencies and reducing transaction costs is innovation accompanied by relevant regulatory changes that ensure that innovations do not broadly generate negative externalities affecting consumers, financial markets, and the economy. In this Article, we consider two technology-based initiatives: “central bank digital currencies” (CBDCs) (digital money designed as a representation of fiat money with universal accessibility and the status of a legal tender) and “stablecoins” (privately issued cryptoassets relying on blockchain technology and aiming to maintain stable value, often through collateralization by other assets that have value).

These public and private innovations are often presented as a study in contrast and competing products. From a policy perspective, CBDCs are described as safer public money, while stablecoins are pictured as risky private alternatives raising systemic risk concerns. Regulators also worry that stablecoins could create unwanted competition for fiat currencies.

In this Article, we change this standard perspective by focusing on how stablecoins may help us reconsider the foundations of the public-private money partnership as it exists to solve the inefficiencies of the current bank-focused system. We identify the pros and cons of the relationship between stablecoins and CBDCs. The United States is unlike many other countries in its historical approach to public monetary sovereignty and the importance of private money and financial institutions. The public does not need to oust the private. Instead, carefully regulated private initiatives should be preserved lest the United States loses the efficiencies of private innovation. Simultaneously, it is self-evident that these assets need to be regulated.

Our exploration into the coexistence of stablecoins and CBDCs reveals a complex and evolving landscape of technological innovation in the payment and financial sectors. We underscore the need for a nuanced understanding of both private and public digital money, highlighting their distinct roles, potential benefits, and inherent risks within the global financial ecosystem. While stablecoins offer innovative solutions and contribute to diversification within the financial and payment sectors, their regulatory challenges and risk factors necessitate careful oversight. Conversely, the emergence of CBDCs represents a significant step by central banks in modernizing monetary systems and potentially enhancing financial inclusion, but these developments raise their own sets of challenges and risks.

A key overarching observation is that public money, including CBDCs, and private money, such as stablecoins, will continue to coexist. Regulators need to adapt to this evolving coexistence and plurality of monetary instruments and create reliable regulatory safeguards for this public-private economic partnership. Better, smarter guardrails for the evolving coexistence of private and public money must simultaneously capitalize on the benefits of private innovation, control its negative externalities, safeguard financial stability, and protect consumers."


[[Category:Crypto Economy]]

[[Category:Articles]]