Christopher Waller

The total market capitalization of stablecoins increased five-fold in the past year alone.

In a speech published Wednesday noon, Federal Reserve Governor Christopher J. Waller reiterated his skepticism for implementing a central bank digital currency, or CBDC, in the United States. However, Waller is not an ordinary cryptocurrency skeptic, as he cites the development of genuine private-sector payment innovations, specifically stablecoins, as the reason why CBDCs are not needed.

Top Stablecoins by Market Capitalization | Source: Treasury Report on Stablecoins (Nov. 2021)

Despite the positive outlook, Waller highlighted three risks surrounding stablecoins. The first of which he noted as a potential destabilizing run, where unregulated or unscrupulous issuers provide financial instruments that go bad, creating a panicked flight to safety that extends beyond initial investors and depositors.

He noted a secondary risk involving payment system failure, where responsibility for different payment functions become scattered across the network due to stablecoins' decentralization. He supposed that this could lead to a wide variance in the appropriate standards of clearing and settlement.

Thirdly, Waller said that stablecoin adoption comes with the risk of scale, i.e., the emergence of a mega-stablecoin monopoly from one single issuer could hurt competition and decreases network benefits to consumers.

Waller went on to praise the decentralized aspects of stablecoins during his speech, saying "The Federal Reserve and the Congress have long recognized the value in a vibrant, diverse payment system, which benefits from private-sector innovation." He continued:

That innovation can come from outside the banking sector, and we should not be surprised when it crops up in a commercial context, particularly in Silicon Valley. [...] We should give those innovations the chance to compete with other systems and providers —including banks — on a clear and level playing field.

In recent years, United States regulators have taken an increasingly soft, but nevertheless interventional stance on stablecoins and cryptocurrencies as a whole. Another entity, the Federal Deposit Insurance Corporation, is currently exploring the circumstances in which banks can engage with crypto assets.