This week Federal Reserve Governor Waller gave a speech on stablecoins, exploring their use cases, business models and challenges. The Governor has long been dismissive of CBDCs and supportive of stablecoins, provided they are appropriately regulated. In fact, he gave another speech on stablecoins in 2021 which arguably was even more supportive, calling for appropriate regulation that’s not overly heavy-handed.
In that earlier speech he said that the ownership of stablecoin issuers doesn’t need to be restricted in the same way it is for banks. That’s because stablecoin issuers cannot provide lending, unlike banks. That is one of the issues where Democrats and Republicans don’t agree with the latest round of stablecoin Bill drafts.
The Governor’s latest speech explored the dollar stablecoin use cases: crypto transactions, foreigners who want to hold dollars, cross border payments and potentially broader retail payments.
The fragility of stablecoin business models
He then moved on to business models, which include:
- interest on stablecoin reserves
- various types of fees or
- potentially using stablecoins to attract customers and sell them other services.
We’d argue the latter model is easier if the issuer is more involved in wallets, which is something Circle has leaned into. This mirrors the models of AliPay and WeChat Pay in China, which make money from a range of financial services, only some of which are payment related (merchant services).
However, Governor Waller highlighted the vulnerabilities of each model. In high interest rate environments, consumers have a big opportunity cost in holding stablecoins that don’t pay interest. Stablecoin issuers could pass some of the interest on to users, but that reduces their profitability. Competitive markets without barriers to entry put a cap on the fees that can be charged.
However, his arguments about the fragility of the business models are tricky to swallow when considering that in the last couple of years Tether has accumulated more than $20 billion in profits with a tiny staff. That doesn’t make his fragility points less valid, and there’s a strong argument that competition could dent Tether’s future revenues.
As a central banker, the Governor naturally touched on the safety and soundness of stablecoins, but didn’t dwell on it. Quite a large chunk of his speech covered fragmentation – both from a liquidity point of view across blockchains, but also the different regulatory approaches around the world.
Despite his apparently supportive stance, in current draft Bills, Republican regulators appear keen to minimize the role of the Federal Reserve for non bank issuers of stablecoins. It’s unclear whether a speech or two might alter their position.
