“I think over the course o f the next year or two, we should be really thinking carefully about the issues that are presented by stablecoins."
These comments came days after the Federal Reserve released a working paper ‘Global Stablecoins: Monetary Policy Implementation Considerations from the U.S. Perspective’, which explores the potential effects of the widespread adoption of a global stablecoin (GSC) in the United States.
The paper confirmed a plan to explore the international dimensions of GSC adoption by analysing a foreign demand for a U.S. dollar-backed GSC, GSC's denominated in other currencies, widespread adoption of central bank digital currencies (CBDC) or multiple CBDCs as well as a world where both multiple GSCs and CBDCs with different characteristics interact with each other.
Even though China is surging ahead in the roll out of it CBDC, The Federal Reserve is taking a more cautious approach and recently announced Plans to Test Five Digital Currencies collaborating with MIT to construct a technology platform for a pilot program for a digital dollar. The nonprofit effort called the Digital Dollar Project declared its intentions to launch the five pilot programs throughout the next 12 months to test the possible deployment of a central bank digital currency in the U.S. which is the first such effort of its kind domestically.
With much of the American conversation surrounding stablecoins relating to the U.S. dollar's status as the world's reserve, some policymakers feared that the success of a Global Stablecoin like Facebook’s Diem could threaten monetary policy with potential overnight adoption by it's 3.3 billion monthly active users. However, Facebook’s Diem, formerly Libra, has dramatically reduced its ambitions from creating a single Global Stablecoin backed by a basket of traditional currencies to initially releasing a USD backed Stable Token positioning itself as a white label provider for central bank digital currencies to operate within its network.
During a conference appearance last week, Christian Catalini head economist at the Diem Association explained that the Diem stablecoin project is a stand-in, intended to be phased out when central banks launch their own digital currencies or CBDCs.
The Diem Association's main goal is to build a cross-border payments structure with a trusted market established around it. Eventually, the goal appears to be to replace Diem's own stablecoin in the system with CBDCs.
"Diem really sees collaboration with central banks as the future extension of the network," said Catalini. "It just provides a better reserve design and to some extent were initially retrofitting faster digital payment on the legacy rails as a bridge measure until you have a CBDC."
Researchers at the Bank of England estimate that if a digital dollar went into widespread circulation, it could permanently lift U.S. output by 3% a year. After Diem positions itself as a first mover in the Global Stablecoin money space, other tech giants like PayPal, who are rumored to be creating a stablecoin competitor may be incentivised to follow suit.
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