According to a Federal Reserve Bank of New York blog post, Stablecoins are unlikely to be the future of payments despite their growth in the last two years.
The two current forms of stablecoins in the market have numerous problems.
The first type of stablecoins that are backed by safe and liquid assets “unnecessarily” tie up too much liquidity. This ties the reserves and makes them unavailable for other uses in the banking system.
The second type of stablecoins that isn’t fully backed resembles private bank notes, which have historically failed according to the authors of the report, including former New York Fed vice president Rod Garratt and economists Michael Lee and Antoine Martin.
Stablecoins pegged to a government-backed currency such as the dollar or euro have become an important part of the crypto universe because investors use them to buy and sell other digital currencies that are more volatile. The market capitalization of these stablecoins has risen from $5.7 billion in late 2019 to more than $176 billion currently. According to the Federal Reserve and other U.S. regulators these types of stablecoins need more regulation and should be issued by regulated banks.
According to the authors, if distributed ledger technology is here to stay, then having banks issue tokenized deposits would be a more “desirable” and “realistic starting point,” This will allow customers to use them in existing payment infrastructures and this approach overall reduces money laundering risks.
It is important to note that the paper published on the New York Fed’s Liberty Street Economics blog page, doesn’t necessarily reflect the official position of the bank or the Federal Reserve System.
“Central bank actions over the last century have resulted in a well-functioning banking and payment system. Why not take advantage of that, and issue tokenized deposits? Bank depositors would be able to convert their deposits into and out of digital assets — the tokenized deposits.”New York Fed Authors
Recently, the Federal Reserve published a 35-page paper that discussed developing its own coin. The paper was just a first step and it didn’t intend to proceed without the full support from the White House and Congress.