Circle Tells Federal Reserve a CBDC ‘Could Destabilize’ Banking

Circle has responded to a Federal Reserve paper Wednesday (May 25) about the possibilities of a U.S. central bank digital currency (CBDC), saying it could “destabilize” banking.

The issuer of the USDC stablecoin said the CBDC, “both in interest bearing and non-interest bearing forms, creates potential domestic flight-to-quality or flight-to-safety problems which could destabilize the two-tiered banking system.”

“It is not clear from the Federal Reserve’s discussion paper that a CBDC would avert run risk or other financial stability concerns,” the report said.

The Fed paper doesn’t advocate for anything yet, but says it wants to look at a variety of views as it decides whether it would be appropriate to make an official U.S. CBDC.

Circle has advocated for a national framework on how to issue, manage and operate CBDCs and says in its response that “rigorous public-sector oversight is needed.”

Among the key points Circle wanted to make was that USDC and various private companies were already doing what a CBDC could do.

“Many of the benefits of a CBDC are already being met by private-sector innovations, like USDC, through blockchain-based payment systems,” the post said. “USDC is a regulated, fully reserved U.S. dollar digital currency that is backed by cash and short-duration U.S. government obligations so that it enjoys price parity with the U.S. dollar.”

The reserves, it said, are held in the care of the U.S. banking system and are issued in compliance with money transmitter requirements.

In addition, Circle added that the CBDC might make problems with financial inclusion worse. The company cited stats that a third of unbanked Americans had a lack of trust in financial institutions, and a CBDC could add to a decline in trust in the government and the existing bank system.

See also: US Senators Set to Unveil Crypto Bill

PYMNTS wrote that the efforts to regulate crypto might include a new bill to set roles for the government watchdogs.

The proposed bill would make the Commodity Futures Trading Commission (CFTC) the primary regulator for spot markets and futures, while the Securities and Exchange Commission (SEC) would work on crypto supervision for assets that could be represented under the Howrey Test, meaning assets that could “fund a company in the same way stocks are offered to fund companies.”