Bank Stablecoins vs. Central Bank Digital Currencies for Capital Markets
Most major central banks are investigating the issuance of a central bank digital currency (CBDC). One motivation has been to stave off competition from stablecoins like Tether that have gained adherents, but which are not necessarily backed by safe and liquid collateral. As a retail product, CBDCs could upend long-standing frameworks of commercial bank deposit money and monetary policy transmission. There are other digital alternatives however: one is bank-issued stablecoins backed by reserves and another is a wholesale CBDC that is traded between banks.
The idea of bank-issued stablecoins (b-coins), defined as fully reserve-backed digital currencies, differs from CBDC along several dimensions. First, the burden of privacy, security and anti-money laundering is moved onto private sector issuers while providing an equivalent functionality to CBDC. Second, b-coins are not a liability of the central bank, but the full reserve component ensures that 100% of a b-coin’s assets are held in central bank reserves, which means they provide the same safety and liquidity as a CBDC. Third, b-coins could be issued by multiple private entities, which sets up the market to promote competition and innovation over time. The link between b-coins and reserves would not diminish the central bank’s current level of control over monetary aggregates.
B-coin issuance could impact capital markets through several channels. Depending on changes in regulations, b-coins may alter a bank’s capacity to carry out capital markets activities. By providing a new “safe asset” option, b-coins could affect cash investor allocations and impact trading activities through the programmability of smart contracts and platform competition. Some of these conclusions are common between a CBDC and b-coins and some differ. This report describes how a b-coin could be implemented and investigates the potential implications for capital markets.
This report should be read by market participants interested in digital currencies and the digitization of capital markets. The broad introduction of b-coins would mark a turning point not just for payments but also how capital markets work, with the possibility of adding a range of new algorithm-driven services for execution and counterparty risk management. Technologists, innovation, strategy and digital teams will find this report to be a useful input into their work. Government policy-makers thinking about CBDC may want to use this report to reflect on the best role for each actor in market activity.
Table of Contents
- Executive Summary
- Defining Reserve-Backed Stablecoins
- – Better In the System Than On Their Own
- The Mechanics of B-coins
- – How Money is Made
- – Cash Movements in the New Model
- B-coins and Wholesale CBDC
- – Are Wholesale CBDCs Necessary for B-coin Success?
- Implications for Capital Markets
- – How Money is Made
- – Regulatory Treatment of B-Coins and Balance Sheets
- About the Author
- About Finadium LLC