How crypto giant Circle could create a US-backed digital currency
Crypto giant Circle has announced its intention become a bank, fully regulated by the Federal Reserve, the Office of the Comptroller of the Currency and the FDIC.
Why is this important: We are still very far from what is happening. But if so, Circle’s USDC stablecoin could become a de facto central bank digital currency.
How it works: Circle’s dream is to become a narrow bank – one that shuns fractional-reserve banks altogether and instead places all reserve deposits at the central bank.
- Only banks can open accounts directly with the central bank, which credits them with pure money.
- In Circle’s case, the “depositors” would be the holders of the USDC, and the collateral backing the USDC would be the money on deposit with the Fed. Circle would pocket for itself the interest the Fed pays on bank reserves.
The big picture: If the dream came true, Circle would effectively issue a cryptocurrency backed by the Fed itself – for all intents and purposes, a central bank digital currency, or CBDC.
- If Circle were allowed to do such a thing, then presumably other banks would be too, and they would quickly start competing with each other to pass most or all of the interest the Fed pays on reserves.
- Buying these stable coins would be like having the money on deposit directly with the Fed.
Between the lines: A potential bank called TNB tried to do narrow banking in the United States and came to nothing. The Fed do not like the idea, for reasons well shiny by Bloomberg’s Matt Levine in 2019.
- Fractional reserve banking is the engine that powers money creation and even modern capitalism. Full reserve banks risk disrupting this model in a way that could prove dangerous.
Be smart: Circle’s chief strategy officer, Dante Disparte, told Axios that the company hasn’t even properly started the application process to become a bank yet; he has just announced his intention to do so. Disparte says they are ready to do “whatever the makers want.”
- It could mean giving up the dream of having 100% of the assets in the form of Fed reserves, even though that’s something all other banks are allowed to do.
The bottom line: Most of the assets of most banks are loans that, in theory, can default. This is also true of Circle’s assets, right now – they’re mostly commercial paper and other low-risk loans.
- Switching to a risk-free system would create a backdoor CBDC. It seems unlikely that the Fed will let this happen without being extremely deliberate about it.
Go further: Central banks move towards digital currencies