Warwick Business School: Stablecoins May Be Path to CBDCs

Warwick Business School held an event in recent days that discussed central bank digital currency (CBDCs), according to a note from the school. The Gillmore Centre Policy Forum heard Antoine Martin, a Senior VP of Research at the Federal Reserve Bank of New York, where he reportedly shared research into the future of digital currencies that claimed stablecoins may be the best path for establishing digital fiat. Of note is the fact that in the past, Martin has been involved in statements that claim stablecoins are not the future of payments.

Established in 2019, the Gillmore Centre Policy Forum’s mission is to research emerging technologies in the financial sector, such as AI, blockchain, mobile payments, cryptocurrencies, and crowdfunding platforms.

According to Warwick, Martin stated:

“Stablecoins are much better payment instruments than Bitcoin and stabalise their value by being backed by assets denominated in a fiat currency. They commonly depend on commercial bank money to hold the reserve assets that back their coin representations and this is typically the US dollar. Stablecoins are very close cousins of Alipay and Tenpay’s digital payment platforms in China. Indeed, for every yuan in customer deposits, Alipay and Tenpay must hold a yuan in an account at the People’s Bank of China, making them functionally equivalent to stablecoins. And so in principle, central bank liabilities could support the provision of stablecoins, much like bank reserves for commercial bank money.”

The US Federal Reserve has been researching the possibility of issuing a CBDC working with MIT. Current Fed Chair Jerome Powell has publicly discussed CBDCs while not ruling out the potential for stablecoins.

Warwick quotes Martin as stating:

“Instead of issuing a retail CBDC, central banks could support stablecoins by allowing them to be backed one-for-one with balances in a central bank account. They could also facilitate a bankruptcy remote legal structure to ensure that end-users are paid in full even if the issuer becomes bankrupt.

“Such stablecoins could be a close substitute for central bank digital money, while balances in a central bank account are risk free and could earn interest. Though stablecoin issuers should be subject to some oversight in exchange for access to a central bank account.

“These stablecoins would be safer to end-users and thus more attractive than those backed with other assets.

“Rather than producing a competitor to digital currencies by producing a CBDC, central banks could be used as a tool by providers to enhance their payment service.

“Adapting our regulatory and legislative environment to support stablecoins is already a formidable task, but it is probably easier than managing a CBDC for retail use, especially as the private sector currently provides all retail digital means of payments on legacy technology.”

The school shared a comment by Ram Gopal, Professor of Information Systems & Management and Director of the Gillmore Centre for Financial Technology, calling Martin’s supposition a fascinating idea.

“The topic of stablecoins and the idea of central banks bringing in their own digital currencies is something the Gillmore Centre is researching. Fintech and cryptocurrencies are evolving rapidly and it is vital the implications and impact of them is researched thoroughly so a robust ecosystem can be developed where consumers are protected and innovation is allowed to flourish.”

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