Will CBDCs Replace Stablecoins?

This has to be the question on everyone’s mind, especially after the aggressive attack on Binance over the past few weeks, coupled with the Federal Reserve and the US Treasury setting their sights on Stablecoins and Cryptocurrencies. Well, before we dig into the future plans of the mighty, let’s first understand what stablecoins are.

To those completely new to the Cryptocurrencies, stablecoins are cryptocurrencies pegged 1:1 to the USD, this could be an Algorithmic peg or in the case of Tether’s USDT and Circle’s USDC, backed by cash and debt. These Stablecoins are the bridge between cryptocurrencies like Bitcoin and Fiat. This effectively means that stablecoins are money because they can actually be redeemed for physical US Dollars and most importantly they are issued by private companies meaning that the Federal Reserve’s monopoly of money issuance is under threat.

This is not the only issue the Federal Reserve has with stablecoins. If we take a look at Tether, 65% of its reserves are commercial paper or corporate debt. Yes, that’s right, debt! In the case of USDC, it is backed by 61% cash and money market funds, this explains why USDC’s issuer Circle is about to be taken public by Goldman Sachs in a SPAC deal and Tether has come under the gun sights of everyone from the SEC to the US Treasury. So if I am trying to be balanced here, stablecoins are not perfect and they definitely need more scrutiny but that’s not what the Federal Reserve or any of the other US government agencies are trying to achieve. So let’s take a deeper look at what the FED is planning.

In order to get a better perspective, I have decided to look at the man at the head of all of this and that’s Federal Reserve Chairman, Jerome Powell. In 2017, Jerome Powell had no interest in a digital Dollar and in fact was quite positive about Bitcoin and Crypto assets, this stance is reflected in several public statements made about Bitcoin and Cryptocurrencies. Well, of course there were no stablecoins yet.

In 2019, Jerome Powell so comfortable with the existence of cryptocurrencies that he even goes as far as saying that, Bitcoin is comparable to Gold and he envisions a United States of multiple currencies.

It’s obvious that J. Powell clearly has his investor hat screwed on and as a former investment banker, clearly knows value when he sees it. This stance was further echoed in February last year. He was explicit that the FED has no interest in a central bank digital currency and the US Dollar was quite fine.

In May 2020, Powell was clearly still in favour of cryptocurrencies and this was reflected in his interview on the TV show, 60 minutes.

So clearly we had a FED chair who was clearly comfortable with multiple currencies and sees Bitcoin as astore of value, in fact one that could replace Gold. So what went wrong? Well, as is always the case the issue didn’t arise from within the United States, rather it was outside the US, yes, China.

In February this year China shocked the world by announcing a Central Bank Digital Currency or CBDC. let’s not forget that Powell was appointed by Donald Trump, who at this point has been deposed by the Democrats who now have Janet Yellen as the treasury secretary, it is Janet Yellen who first lines up the crypto markets in her gun sights. That same month Janet Yellen highlights Bitcoins inability to be used as a sustainable global payment system.

It was after this statement that Jerome Powell, in the same month made a statement that a US digital Dollar is a top priority for the Federal reserve. This is a dramatic U-turn from his previous stance and there are no prizes for guessing who is pulling the strings at this point. Did someone say Yellen?

At this point it is clear both the Federal Reserve and US Treasury are both considering a Central Bank Digital Currency. It’s officially an arms race between the United States and China. At this point it becomes clear that the initial ideas of multiple currencies and most crucially stablecoins have no place in this arms race, unless they are willing to be under the control of the Federal Reserve and US Treasury. We can’t have private people issuing currency in the middle of a war can we? Or can we?

It’s clear at this point that stablecoins are going to be the focus of the witch hunt, I did mention Goldman Sachs and Circle didn’t I? It’s more than likely Goldman Sachs and the major banks don’t want to lose their most recent poster child, yes, that’s Circle’s USDC. Well, it shouldn’t surprise you to learn Circle and Coinbase formed a joint venture in 2018.

It wasn’t long before Jerome Powell announced the FED will be consulting with various third parties in cryptocurrencies on the best way to proceed with a CBDC. Yes, you guessed it, those said third parties were Coinbase and JPM.

At this point things are shaping up. We have Coinbase and Circle with the help JPM and Goldman Sachs trying to save USDC. At this point all eyes focus on Tether’s USDT, the largest stablecoin in circulation backed by debt. This makes them a rather convenient target.

So we have our scapegoat, our sacrificial lamb to the alter. At this point Tether is scrambling for audits and is rather desperate to be included in the fold. We already know Binance is under fire as it is in bed with Paxos, the issuer of BUSD another stablecoin backed by 96% cash and cash equivalents but I doubt that will save it. So the stage is set for the final act.

Yes, they finally come out and say it. There is no need for stablecoins or cryptocurrencies if there is a robust US digital currency. So at this point we can see the future of fiat is now in CBDCs. The crypto markets, Tether have all been scape goats in what is a bid to compete with China in the race to global financial dominance and the reserve currency status. The only thing that remains is to convince the world and the American public that this is the best thing for them. This is clearly already underway.

So you ask, will CBDC’s replace stablecoins? Well, it certainly will. I predict the last man standing will be USDC, it is more than likely that the FED will need to approve every single stablecoin for use in the United States and Internationally and this will mean that these existing stablecoins may well be issued under the direct supervision of the FED. I do not have an issue with this. However I suspect that they won’t stop there. We may well see cryptocurrencies listed as securities and any project refusing to play ball will be designated as illegal and the mere ownership of these assets will constitute a criminal offense. I am thinking at this stage the Bitcoin maximalists had a point, the last man standing may end up being Bitcoin and cryptocurrencies built like Bitcoin due to their decentralised nature and lack of central ownership. It’s a new paradigm in global finance and this story is far from over.