have allowed Circle to take loans from the Fed and so overcollateralise to meet demand .
But simply having a Federal Reserve master account would not be sufficient . To accept loans from the Fed , Circle would have to have enough high-quality collateral to obtain them , to begin with . Currently , Circle holds $ 39bn in US Treasuries , not enough to defend its peg and take loans to stabilise its circulating supply .
But none of this matters even if Circle acquired the TRUST Act ’ s NLPSI licence . The legislation explicitly excludes NLPSI-holders from accessing the Feds lending facilities .
So back to square one . Circle has decided it would like to become a crypto bank . In April , Jeremy Allaire , CEO of Circle , said the company would submit its application to become a chartered crypto bank , “ hopefully in the near future ”.
Getting chartered would give crypto banks the ability to accept cash deposits and provide crypto custodial services . In theory , a charter could lead to a master account that would grant access to the Federal Reserve system .
But being a chartered crypto bank does not guarantee access to the Fed ’ s discount window . Nor do chartered crypto banks and non-bank crypto firms have deposit insurance under the Federal Deposit Insurance Corporation ( FDIC ).
It just so happens the Federal Reserve announced on 15 August it has finalised a guideline for firms wishing to obtain a master account . The likelihood of getting access will effectively depend on how regulated and federally insured firms are i . e . FDIC deposit insurance .
This begs the question : If licensed banks have master accounts , can access the Fed lending services , are federally insured and can issue stablecoins under TRUST , why have cryptonative stablecoin issuers at all ?
All roads lead to Rome
Despite the potential rise of traditional bank stablecoins , few banks are even close to running an operation on the scale attempted by cryptonative stablecoins issuers .
At best , traditional banks are looking to tokenise certain products and systems within their operations . For instance , in 2019 , a consortium of banks led by UBS came together to propose a utility settlement coin USC for cross-border payments and a year later JP Morgan unveiled the JPM Coin for the same purpose .
There is a good reason for this . Even if traditional banks had the regulatory backing and high-quality collateral , they would still not have dominance over both sides of the peg .
As academics Christian Catalini and Alonso de Gortari wrote in a paper titled On the Economic Design of Stablecoins : “ The volatility of the reserve asset relative to the reference asset determines how much a stablecoin ’ s reserve is needed , at a point in time .”
For instance , short-term US Treasuries are some of the most liquid and secure collateral available to stablecoin issuers . Yet , the value of US Treasuries can rise and decline due to interest rate shocks or mass liquidation . In essence , they carry more risk than the asset they are referencing , US dollars .
Ideally , the value of the reserve asset and reference asset is always identical , meaning
Chapter 1 : Market outlook
that the amount of collateral liquidated to maintain parity is always the same and risk-free .
This only applies to central bank digital currencies ( CBDCs ) since the central bank controls both the collateral and the reference asset , hence both sides of the peg .
“ If we ever see a central bank issue a stablecoin , that would be as close as we could get to a true stablecoin as they would be managing both sides of the peg ,” Lukas Enzersdorfer-Konrad , chief product officer and deputy CEO at Bitpanda , told ETF Stream .
A tokenised US dollar would be virtually void of the risks faced by any crypto-native or traditional bank offering . With 100 % reserve backing , unlimited high-quality like-for-like collateral and no exposure to the risks of traditional bank insolvency , CBDCs could defend their pegs and deliver on the promise of stability .
While crypto-native stablecoin issuers come to grips with regulators and banks tread carefully , 105 countries have researched their own central bank digital currency . According to data from CBDC Tracker , 66 countries are actively researching CBDCs with the Bahamas and Jamaica already launching central bank-backed virtual currencies .
Centralised , government-run and fiat-backed , CBDCs are the antithesis of what stablecoins and , for that matter , crypto is all about . However , all roads lead to Rome and if stability is the name of the game , government is occasionally best equipped to ensure that crypto investors are not exposed to the terra-fying consequences of stablecoin instability .
Stephan Roth is special reports writer at ETF Stream