Digital Dollar and Stablecoin Policy Moves Forward

Throughout the week, steady low level activity has been visible regarding digital currencies globally.  It's only Tuesday, but the cross-border public policy arena has suddenly become much more welcoming to cryptocurrency and, particularly, stablecoin issuers.  We saw a similar shift in Greece during the crisis years (before crypto was a thing): government efforts to streamline distribution of stimulus funding joined up with efforts to cut down on fraud and tax evasion to create nearly overnight operational deployment of electronic currency distribution mechanisms.

The same dynamic is underway right now. Six different initiatives have been unveiled in the last few days, half of them in the last few hours today, regarding digital currency.  The pace and breadth of activity would be stunning under normal circumstances.  It is that much more remarkable when it occurs against the backdrop of COVID19 crisis policy activities.  Consider:

1. Electronic Stimulus Distribution:  The distribution of Stimulus #3 funding in the United States will occur through direct deposits, which is a form of electronic currency.  Academics and privacy advocates will have a field day analyzing the implications of how the federal government can identify and issue payments directly to personal bank accounts.

2. IOSCO Report:  The international Organization of Securities Commissions today released a report detailing how it expects to extend the regulatory perimeter to stablecoins.  From a standards perspective, the report largely re-hashes and fine-tunes last year's policy pronouncements.  The report instead is significant because it describes in great detail a hypothetical situation in which "users could make payments using the (hypothetical) Coin.  These activities could potentially amount to regulated payment and banking activities or even regulated payment systems.  If adopted at a large scale it could become systemically important."

The facts in the report do not look very hypothetical.  They mirror closely much of the structure launched this tine last year by JPMorgan.  Dubbed the "JPMorganCoin," it has been circulating in the JPMorgan system among institutional clients.  It does not require much imagination to believe that this system alone could quickly acquire sufficient scale to warrant regulatory attention.  

3. Bank of England:  The Bank of England  today released minutes of a meeting by the Wholesale Distribution Steering Group.  Pro Tip:  The correlation between dull government committee titles and strategically significant activities is not quite 1, but it is very very close.  In this case, the committee in question is designing "a new end-state model for wholesale cash distribution."  While the meeting occurred pre-crisis (in January), the group's workplan includes a consultation release in April or May.  If the pandemic subsides sufficiently to warrant a return to regular policymaking, don't be surprised to see a late spring suggestion for how the UK can accelerate adoption of a central bank digital currency.

4.  Commodity Futures Trading Commission:  Last week, the Commodity Futures Trading Commission announcement that it would issue Interpretive Guidance regarding the definition of "actual delivery" for purposes of applying commodity trading regulation to the cryptocurrency sector.  As expected, the guidance was issued today.  While industry advocates will be disappointed that the CFTC did not relax formally its rules, they will find that many of the examples in the guidance provide sufficient flexibility to foster continued innovation in this market.

5.  Senate Legislation:  Senator Sherrod Brown managed to find time away from Stimulus #3 negotiations to introduce a bill today that would authorize banks and post office branches to provide "digital wallets" and account services to receive and transmit electronic versions of the U.S. dollar, subject to the following restrictinos:  no account fees, minimum balances, or maximum balances can be charged. The interest rate would be fixed to the interest rate for regular dollars.

6.  House Legislation:  Two bills have been floating through the House in the last week, one introduced by the Speaker of the House and on introduced by the Chairman of the Financial Services Committee, both referencing a "digital dollar" and, amazingly, authorizing the Federal Reserve to create a direct relationship with individuals through accounts to distribute the digital dollars. It is a sign of the severity of the pandemic crisis that House Democrats were willing to place so much trust in the Federal Reserve.   

References to one or both bills reportedly made a brief appearing in the Stimulus #3 package, but leaks to the media indicate Stimulus #3's direct payments to individuals will occur thorugh the regular banking system without reference to a "digital dollar."

Analysis: Any one of these initiatives, by itself, does not represent a paradigm shift in policy.  Bills are introduced in Congress regularly without receiving any traction.  Regulatory guidance has a low weight compared to full regulation, much less legislation. But when all these initiatives occur within a few days or hours of each other...sponsored by leadership...they signal that much more policy discussion is underway behind the scenes.  

The aggregate activity signals that official sector endorsement and distribution of central bank digital currencies as well as privately issued stablecoins linked to sovereign currencies could be rolled out very quickly once the pandemic peak has passed.