Instead of funnelling time, money and resources into the bottomless pit of central bank digital currency (CBDC) development, central banks should back stablecoins as an alternative. 

This is the main takeaway from the Federal Reserve Bank of New York‘s financial research advisor Antoine Martin‘s research, which was presented at the Gillmore Centre Policy Forum. The forum took place at Warwick Business School‘s London location in the Shard on 21 November.

Martin’s research reveals that existing digital currencies have the potential to create a new path for CBDCs. Instead of throwing more money and resources into producing their own digital currency, he says that central banks could and should support the development of safe stablecoins.

Federal Reserve Bank of New York's financial research advisor Antoine Martin
Antoine Martin, financial research advisor, Federal Reserve Bank of New York

“Stablecoins are much better payment instruments than Bitcoin and stabalise their value by being backed by assets denominated in a fiat currency,” says Martin.

He explains how stablecoins commonly depend on the money of commercial banks to hold the reserve assets that back their coin representations. This is typically fulfilled by the US dollar.

“Stablecoins are very close cousins of Alipay and Tenpay’s digital payment platforms in China,” continues Martin.

For every yuan in customer deposits, the platforms must hold a yuan in an account at the People’s Bank of China, which Martin explains makes 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,” he says.

A formidable task

Also giving talks at the event were Sir Jon Cunliffe, deputy governor of the Bank of England, and Lord Chris Holmes, vice-chair of the All-Party Parliamentary Group (APPG) on fintech, House of Lords.

The Bank of International Settlements and the Bank of Canada were also present at the forum.

“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,” continues Martin.

He explains how stablecoins 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,” he says.

“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,” Martin continues.

“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.”

Ram Gopal, professor of information systems and management and director of the Gillmore Centre for Financial Technology, confirms his opinion that this “fascinating idea…will need research.” He also adds that the centre is actively researching this realm of digital currencies.

“Fintech and cryptocurrencies are evolving rapidly and it is vital the implications and impact of them is researched thoroughly,’ says Gopal.

This research he says will develop an ecosystem where consumers are protected and innovation flourishes.

The Gillmore Centre

Warwick Business School’s Gillmore Centre was established in 2019 thanks to a £3million donation from Clive Gillmore, founding member and CEO of Mondrian Investment Partners that holds Rothko as a subsidiary.

Its mission is to research emerging technologies in the financial sector such as AI, blockchain, mobile payments, cryptocurrencies and crowdfunding platforms.

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