The Fed takes cryptocurrencies seriously after Diem launched

The chairman of the US Federal Reserve (Fed), Jerome Powell, has announced that he will consult the public this summer on a possible central bank digital currency (CBDC). He recognized both the benefits and risks of stablecoins and indicated that new regulations would be enacted. With the US-based stablecoin USDC growing from 2.9 billion to 18.7 billion in just 6 months and Diems Dollar Stablecoin (formerly Libra) in the near future, this decision comes as no surprise.

Jerome Powell – Chairman of the US Federal Reserve

This is not just a press release. Powell had one speech accompanying note. Overall, these are high-priority topics on the agenda.

So far, the Fed seems to have been a bit secretive about the digital dollar, although the Boston Federal Reserve is researching with the Massachusetts Institutes of Technology (MIT), according to the report. news officially. This announcement takes on a different tone and encourages more innovative innovations. And maybe show urgency?

Powell said:

“Stablecoin is about leveraging new technology in ways that have the potential to improve payment efficiency, accelerate payments, and reduce costs for the end user. However, they carry risks as they do not provide user protection and can affect the entire financial system. Therefore, as the use of stablecoin increases, we need to look for the right regulatory and supervisory framework. Attention also needs to be paid to private sector payment innovators, who are not currently part of the traditional regulatory arrangements that apply to banks, investment firms and other financial intermediaries. “

Many trading pairs are rated based on stablecoins. Amid the crypto boom, USDC has grown exponentially, from a market cap of $ 2.9 billion 6 months ago to $ 18.7 billion on May 21. Today that number has grown to $ 19.4 billion. Support reserves for stablecoins are checked monthly by Grant Thornton with a two-month grace period.

The growth rate of USDC (as of May 21, 2021 | Source: Coinecko

A great risk arises when suddenly masses are converted into stablecoins. With large bank reserves, this can lead to massive withdrawals from accounts. Not all reserves are in the form of deposits, but some are in “approved investments”. Another central bank concern is potential market distortion due to a surge in demand for treasury or money market funds used as stablecoin reserves.

An even bigger risk that central banks see is the Facebook stablecoin Diem. If USDC can grow exponentially without a user base like Facebook, how fast can Diem get huge? Just a week ago, Diem announced a move to the US and a deal with Silvergate Bank to issue a US stablecoin.

CBDC Is it an urgent matter right now??

So the question is, will Diem and the rapid growth of stablecoins change the urgency of CBDCs?

Powell said:

“We believe it is important that any potential CBDC can serve as a complement, not a substitute, for cash and existing private sector digital forms such as deposits at commercial banks. As part of this process, we will seek public opinions on issues related to payments, including finance, privacy and information security. “

There’s a little chain effect here. When Diem is ready to roll out, the Fed could expedite its decision to roll out a CBDC. Canada in the past said they are preparing to issue a CBDC to combat dollarization from a global stablecoin or US CBDC. Now Canada is likely to speed up its activities.

Alternatively, the central bank can prevent mass adoption through regulations. That could delay the stablecoin sector as central banks try to catch up.

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