Stablecoins Safer Than Bank Deposits: Ex-Fed Policy Analyst

• Brendan Malone – a former Federal Reserve Board analyst – argues that dollar-pegged stablecoins may actually be less risky to hold than traditional bank deposits.
• Stablecoins are blockchain-based tokens that are value-pegged to a fiat currency or other “stable” asset, and allow users to benefit from the efficiency of blockchain transfers and services without being exposed to volatility.
• The House Financial Services Committee advanced the Clarity for Payment Stablecoins Act of 2023 to the House floor, putting stablecoin regulation at the forefront of discussion in the United States.

Overview

Brendan Malone, an ex-Federal Reserve Board analyst, has put forward an argument claiming that dollar-pegged stablecoins may actually be less risky to hold than traditional bank deposits. These blockchain-based tokens are value-pegged to a fiat currency or other “stable” asset, meaning they provide users with efficient access to blockchain transfers and services without being exposed to volatility. Regulating these assets is now on the table in the United States after the House Financial Services Committee advanced the Clarity for Payment Stablecoins Act of 2023 onto the house floor for discussion.

Stablecoin Definition

Stablecoins are blockchain-based tokens that are value-pegged to a fiat currency or other “stable” asset – most frequently the U.S. dollar – allowing users access to efficiency provided by blockchain transfers and services without being exposed to volatility seen with common cryptos like Bitcoin (BTC) and Ether (ETH). The two largest stablecoins by market cap today are Tether’s USDT and Circle’s USD Coin (USDC), cumulatively representing over $100 billion in value. Issuers for both coins issue regular reports about their reserve composition, which usually consists solely of cash and short-term government debt.

Risk Comparison

Malone argued that stablecoins are inherently less prone to a bank run than actual banks due to strict nature of issuers managing their reserves; reserve assets match the stablecoins outstanding one-to-one, consist of central bank liabilities or shortdated Treasuries, segregated from issuer’s own assets and protected from creditor process as well as subjecting them assessments/audits etc.. On contrary , business of banking can be “highly risky” as banks often use customer deposits for investing in longer duration assets leading them vulnerable towards drop in face value causing depositors running away leaving banks unable satisfy all withdrawal requests . This is exactly what happened during Silicon Valley Bank’s (SVB) collapse before March this year .

Circle’s USDC Case Study

Circle’s USDC also lost its peg with US Dollar when same time when SVB collapsed because it had kept over $3 billion worth reserves with form bank deposits there . This makes it clear how risk management framework applicable for stablecoin should be designed keeping into account unique risks associated with them , which clearly differentiate it from those arising in traditional banking system .

The Clarity For Payment Stable Coins Act Of 2023

The House Financial Services Committee advanced legislation named Clarity for Payment Stable Coins Act Of 2023 last night , which aims at regulating usage & transactions related into such tokenized coins & ensuring proper security regulations & protocols remain intact while using such digital currencies .

Stablecoins Safer Than Bank Deposits: Ex-Fed Policy Analyst
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