Obstacles and Difficulties Faced by the US CBDC – Is it Good or Bad for USDT?

Challenges and Hurdles Confronting the US CBDC - Beneficial or Detrimental for USDT?

Author: Terry, Blockchain in Plain Language

On November 1st, LianGuaiyLianGuail received a subpoena from the enforcement division of the U.S. Securities and Exchange Commission (SEC) regarding the LianGuaiyLianGuail stablecoin, PYUSD, which was once seen as a promising project but now seems to be facing the same troubles that Facebook faced with Libra.

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At the same time, as stablecoins continue to diversify globally, countries are actively researching and launching central bank digital currencies (CBDCs). The regulatory developments in the United States are particularly noteworthy. However, recently, U.S. Congressman Tom Emmer proposed the “CBDC Antisurveillance Act” aimed at preventing the Fed from directly issuing CBDCs to individuals and prohibiting the Fed from indirectly issuing CBDCs through intermediaries.

01 The Fed and Congress: The Dilemma between Regulation and Privacy

In June 2019, when Facebook (now Meta) released the whitepaper for its private digital currency project Libra, it acted as a catalyst, prompting central banks to accelerate their existing digital currency plans and greatly stimulating the interest of central banks worldwide in CBDCs and the global stablecoin ecosystem.

According to the Atlantic Council’s statistics, a total of 131 countries (which account for more than 90% of global GDP) are exploring CBDCs. However, compared to the four major central banks (the Fed, the European Central Bank, the Bank of Japan, and the Bank of England), the approach of these banks is relatively cautious, especially with regards to the progress of CBDCs in the United States.

In short, the U.S. regulatory landscape has yet to reach a unified consensus on whether to launch a CBDC, and the main dilemma lies in differing positions:

The U.S. congressmen mostly oppose CBDCs from the perspective of privacy and financial freedom, repeatedly stating that “CBDC is a government-controlled programmable currency. If it is not designed to mimic cash, it could give the federal government the ability to monitor and restrict transactions by Americans.”

The Federal Reserve, SEC, and other regulatory agencies, on the other hand, consider the significant impact of CBDCs on payment settlement systems and regulatory dimensions concerning stablecoins on the blockchain.

For instance, Federal Reserve Chairman Powell mentioned in a recent congressional hearing on September 28th: “There is a great deal of private innovation going on, and much of that is occurring outside of the regulatory perimeter. When it comes to the public’s money, we need to make sure we have appropriate regulation. And there are areas where, currently, we don’t.”

He also stated that the Fed is “actively evaluating whether to issue a CBDC and, if so, in what form”, and mentioned that a report on CBDCs, stablecoins, and cryptocurrencies will be released soon. This shows that the United States is still in the early stage of evaluating and studying its own CBDC issuance, and no specific technical plan for adoption has been determined so far.

However, although the US government has not yet reached a unified opinion on issuing digital dollars officially, the digitization of the US dollar has already come a long way with the help of US dollar stablecoins. Currently, US dollar stablecoins are essentially digital tools for the US dollar.

02 Tether, Circle: The drivers of digitalizing the US dollar

When Libra first appeared out of nowhere, many people exclaimed the arrival of the “digital dollar” era, but little did they know that was almost its only moment of glory.

Afterwards, Libra continuously adjusted its vision under regulatory pressure, while in 2020, US dollar-based stablecoins experienced explosive growth. This can be seen as a large-scale experiment of the “digital dollar” in another sense.

In particular, USDT and USDC have become alternatives to the US dollar for many users in globalized applications such as cross-border payments. As of November 3rd, according to Coingecko data, the total circulating market value of USDT has exceeded $85 billion, reaching a historic high.

With the continuous growth of USDT, it not only serves the retail and consumer markets but also clearly provides services to many medium-sized and large companies internationally.

At the same time, Tether has an open position of $72.5 billion in US Treasury bonds, ranking among the top 22 buyers globally, surpassing countries such as the United Arab Emirates, Mexico, Australia, and Spain. Circle also holds over $30 billion in US Treasury bonds. Tether and Circle have become representatives of the Federal Reserve in the cryptocurrency industry.

It is worth noting that after the total issuance of PYUSD, the stablecoin launched by LianGuaiyLianGuail, fluctuated around $40 million for many days, it has restarted printing in October and has already exceeded 150 million coins by the time of writing. It has also been listed on mainstream exchanges such as Coinbase and Kraken.

As a well-known traditional payment giant, LianGuaiyLianGuail’s every move in the stablecoin field not only brings new variables to the stablecoin market with a fixed pattern, but also undoubtedly has a great flow effect. It is bound to attract regulatory attention again, just like Libra that was forced to retreat midway by Facebook back then.

Overall, as the largest third-party payment institution in the United States, PYUSD is destined to bring long-term benefits to the cryptocurrency market, especially when choosing to issue on Ethereum, it takes the vision of Ethereum as a global settlement layer a step further.

03 Stablecoins & CBDCs?

However, the continuous expansion of stablecoins has both advantages and disadvantages for the digitization process of the US dollar, and it may bring potential risks and challenges:

On one hand, as stablecoins are widely used, they are having an increasingly significant impact on the existing financial system. For example, the combined volume of USDT/USDC has already exceeded 100 billion US dollars, and there is a possibility of triggering systemic risks.

On the other hand, stablecoins still lack direct regulation to some extent. If they are used as tools for money laundering, fraud, and other illegal activities, they could potentially disrupt the financial order.

This brings up some underlying differences and characteristics between CBDC (Central Bank Digital Currency) and stablecoins. It is important to clarify that CBDCs may not necessarily have a strong connection with blockchain technology because all CBDCs are definitely centralized systems.

Take China’s digital currency electronic payment (DCEP) as an example. It is explicitly not built on the mainstream public blockchain architecture and follows a dual-layer operational model. The central bank acts as the first layer, initially converting DCEP for commercial banks and specific commercial institutions. The second layer is managed by commercial banks or specific commercial institutions, which are responsible for meeting the public’s demand for opening digital wallets and exchanging DCEP. This design is similar to the centralized issuance mechanism of existing cash.

Therefore, if the Federal Reserve issues CBDC in the future, it will be different from existing on-chain stablecoins like USDT, USDC, PYUSD, or DAI. CBDCs rely more on the existing traditional financial system for issuance and operation, allowing banks and financial institutions to connect to the digital currency system.

In fact, CBDC represents a more controllable and centralized form of digitized US dollars. In some ways, it does not directly compete or squeeze out on-chain stablecoins, especially at a time when countries are vigorously researching and launching CBDCs. Cross-system exchanges of CBDCs between different countries are still in the early stages and cannot match the convenience of stablecoins like USDT, which are based on global public blockchains.

Therefore, there may be a complementary relationship between CBDCs and on-chain stablecoins. For example, on-chain stablecoins could be responsible for cross-border payments and settlements, while CBDCs can form various financial products based on digital currencies to manage the financial system.

However, on the other hand, in the context of the continuous development of stablecoins, cryptocurrencies like Bitcoin, and other digital currencies, a more “controllable” CBDC can actually help central banks address challenges posed by third-party payment systems and private digital currencies. It can better maintain stability in the financial market, ensure the international status of the US dollar, and increase the transparency of the financial system, reducing the possibility of illegal activities.

So, in this situation, the necessity of the Federal Reserve launching CBDC is increasingly evident. Especially, how to balance the advantages and potential risks of stablecoins, as well as how to formulate corresponding regulatory policies, will be issues that need to be further explored in the future.

04 Conclusion

The issuance of a CBDC by the Federal Reserve is still unknown at this point, because without a legal definition, what the central bank is issuing is only a stablecoin, not a true central bank digital currency. Therefore, reaching a consensus at the Federal Reserve and the administrative legislative level in the United States is required.

However, with the continuous expansion of on-chain stablecoins such as USDT, USDC, and the constant stirring behind the scenes by giants like Libra and PYUSD, it is believed that financial regulatory institutions will take action soon. This is both for the sake of innovation and for the future.

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