January 13, 2022

Can US CBDC and Stablecoin Coexist? This is Powell's Explanation the Market Needs to Know!

 In Jerome Powell’s speech early Wednesday morning, he touched on the issues of CBDC, stablecoin and inflation. Based on his statement he seems to have reversed one of his previous stances on the linkages between CBDC and stablecoin. He testified before the U.S. congress by suggesting that the two could be created together without having to replace them.

Powell also gave more input on the possibility of the Federal Reserve in the production of CBDCs during his keynote address on Wednesday. Republican Senator Pat Toomey who is a proponent of crypto raised the question of whether stablecoin will be sidelined after the launch of CBDC.

Powell's answer was quite simple, "No, not at all." Market players interpret this as a less hawkish tone towards stablecoins compared to Powell’s previous statement. Last July, he suggested that among the functions of the CBDC was to replace cryptocurrencies including stablecoin. However, Powell does not intend to ban other crypto assets directly, setting a different regulatory approach than China.

Nevertheless, stablecoin continues to be a hot topic among regulators. Both industry leaders and congressmen put forward conflicting views on the matter during last month’s hearing. The industry considers stablecoin as a complement to the financial system. On the other hand some have suggested that it could be a threat to the US dollar. Some also suspect that stablecoin could be classified as a security.

Another question is about the practical utility of privately issued stablecoin with the existence of CBDC. However, CBDC production seems to be still a long way off. Powell has previously stated that he would rather “do it right than do it fast,” and this indirectly gives room for Tether, Pax and USDC to operate without CBDC.

In the near term, the Fed is planning to issue a detailed report on the advantages and disadvantages of CBDC implementation in the United States.

On the topic that has been most talked about lately is inflation, which has been the Fed's most important thing in almost 40 years, where inflation was at its highest level last month. Powell said with inflation far above target, the economy "no longer needs or wants another policy".

The chairman of the Fed continues to signal that the Fed will prioritize raising interest rates as soon as possible to combat the issue.