On January 4 the Office of the Comptroller of the Currency (OCC) issued a letter of explanation stating that U.S. national banks and federal savings associations can become operational nodes for blockchain stablecoins and use the associated stablecoins for “permitted payment activities,” arguing that the blockchain stablecoin network can serve as a “cheaper, faster, and more efficient” payment method to reduce the cost of cross-border transactions, thus authorizing banks to use the blockchain and its stablecoin to convert back and forth between fiat currencies during remittances or to issue their own stablecoins if they choose (for example, JPMorgan Chase Bank has proposed to launch its own USD stablecoin, JPMcoin, etc.).
Some see this as a huge win for the crypto industry and the public chain, where banks can see the public chain as a financial infrastructure like SWIFT and Fedwire, view stablecoins (e.g. USDC, etc.) as the new electronic stored value, and help make the U.S. a leader in embracing the public chain and stablecoins, promoting dollar-based digital stablecoins as the mainstream medium for payment settlements and further enhance the influence of the dollar in the global scope. 2021 will be a critical year for public chains and stablecoins to enter the mass market, and the door to a new era is quietly opening and the game is on.
So, how should we view this move by OCC?
First of all, the stablecoins referred to by this statement of OCC are not arbitrary stablecoins, but stablecoins that have been reviewed and approved by the regulator and are subject to its continuous supervision. At present, such stablecoins mainly include USDC, GUSD, PAX, etc. Stablecoins that have not been reviewed and approved by the regulator, such as USDT, are not included in this scope, despite the fact that they have been in operation for a long time and currently have a large market influence. More importantly, by stablecoin, OCC means a stablecoin that is simply pegged to the U.S. dollar (effectively a “network token” for the U.S. dollar), not a stablecoin that is pegged to the currency of another country, nor a super-sovereign stablecoin that is structurally pegged to a basket of currencies, including the U.S. dollar (although the U.S. dollar may have the largest currency basket coefficient, still different from the US dollar). Also, this does not include virtual cryptocurrencies that are entirely internally generated (requiring “mining”), such as bitcoin and Ethereum, because they are not linked to the dollar in any way and would not contribute to strengthening the dollar’s international position.
Thus, what the OCC calls a public blockchain is not a decentralized, permissionless open-source blockchain like Bitcoin or Ethereum, but a permission chain that requires participants to comply with all legal requirements, including applicable laws and regulations on real user names, anti-money laundering, anti-terrorist conveyance, and consumer protection. This statement by the OCC does not represent a victory for permissionless public chains.
Secondly, this move by OCC reflects the US regulator’s support for blockchain and stablecoin innovation exploration, actively seeking to seize the leading position in blockchain and stablecoin payment and settlement, and enhancing the international influence of the US dollar, while also indicating its attitude that stablecoin must be included in strict regulation. Innovation in money and finance must be carried out under the premise of macro-prudential supervision and legal compliance.
Once again, this move by the OCC is not a problem to implement in the U.S., but if it is to promote the U.S. dollar stablecoin for cross-border payment settlement, it actually requires the international community to reach a consensus and form international rules for common compliance. Otherwise, even if the U.S. dollar is allowed to be freely convertible with the stablecoins in the U.S., it does not mean that other countries also allow this stablecoins to be freely convertible with their own currencies, which is bound to create many problems. At the same time, the U.S. can launch the U.S. dollar stable currency operating system, other countries can also launch different operating systems such as the euro stable currency, the RMB stable currency, the yen stable currency, etc., which may form a competitive situation, and finally, the international influence of different stable currencies still depends on the comprehensive national power and international influence of the issuing countries, and of course, it will also be affected by the efficiency and security of different stable currency systems. From the perspective of maximizing the world’s overall interests, the coexistence of multiple cross-border payment and clearing systems inevitably involves huge investment and system operation and maintenance costs, which is not a reasonable choice. This cross-border payment clearing system is actually a kind of financial infrastructure, and the more centralized and unified the system operation and management rules are, the better.
One important takeaway to note:
Money and monetary expression and operation need to be grasped separately.
With the emergence and continuous development of Bitcoin, the concept of “digital currency” has been heating up, and decentralized digital cryptocurrencies generated within the network, network stable coins pegged to a single fiat currency, super-sovereign network stablecoins structurally pegged to a basket of fiat currencies, and central bank digital currencies digitized by fiat currencies have emerged, triggering heated debates worldwide on the nature of money, its origin, its functions, its expression and operation, monetary policy and monetary control, etc.
But in fact, these arguments largely blur the distinction between the manifestation and operation of currency and confuse them.
Currency is actually created and developed to meet the needs of social wealth exchange transactions, playing the core functions of value scale and medium of exchange. Its development has gone through the stages of natural physical money (the most admired items by social groups, such as special shells, bones, feathers, etc.), regulated metal money (gold, copper and silver coins made according to certain regulations), metal standard system paper money (metal money for daily circulation and other tokens), and credit money which is purely free from physical objects.
Now, the currencies of all countries in the world have entered the stage of credit money, realizing the historic leap from physical money to credit money. So, why does money have to be transformed from physical money to credit money, and whose credit is the “credit” of credit money?
This is because, with the development of the economy and society, people realize that money is becoming more and more important, but often serious problems arise because of too much money or insufficient supply. How to maintain the basic stability of the value of money and give full play to the role of money as a measure of value and a medium of exchange becomes an important economic and social problem that must be solved.
After the practice of paper money circulation under the metal standard system, people gradually discovered that money actually does not have to choose a special physical object in society to act as a currency, but can be a pure unit of value or a symbol of value, and theoretically, to maintain the basic stability of the currency value, it is necessary to ensure that the total amount of a country’s currency can correspond to the total scale of tradable wealth within the sovereignty of the country and which can be protected by law, and with the scale of social wealth change, it can be adjusted. Thus, gold, silver and other natural objects that have served as money must be withdrawn from the monetary arena and returned to their origin in social wealth, and their value needs to be identified (priced) with a new currency. Money, on the other hand, must be detached from social wealth and become a pure representation and counterpart of wealth value. Money itself can no longer have physical value, but it is socially acceptable because the total amount of money is based on the value of all tradable wealth in a country, which is protected by national sovereignty and laws and backed by national credit, so this non-physical money is called credit money and is also called sovereign money or fiat money.
Thus, if a currency does not have a sovereign and legally protected wealth counterpart, it is difficult to guarantee its value stability and become a true credit currency. With national sovereignty still existing and the world not yet integrated, it would be a monetary regression and unlikely to succeed to revert to using gold or any other physical object as currency, or to create a decentralized cryptocurrency with a strictly locked-in aggregate and phased supply, as compared to the principle of gold.
However, even credit money, with the development of science and technology, its manifestation form and operation mode are also changing, experiencing from cash money (manifestation form including physical banknotes and coins, operation mode manifesting as direct cash receipt and payment), deposit money (manifestation form as bank deposits, operation mode manifesting as cash withdrawal through deposit certificates or bank paper-based transfer clearing), electronic money (manifestation form as deposits in payment institutions, and in the way of operation of electronic carriers and information-based bookkeeping), digital money (in the form of more digital expression, and in the way of operation of more networked and intelligent), and so on. in the form of deposits in payment institutions, and in the way of operation of electronic carriers and information-based bookkeeping), digital money (in the form of more digital expression, and in the way of operation of more networked and intelligent), and so on. It can be seen that the essence of money will not change, but its manifestation can be constantly changed, in order to promote its continuous improvement of operational efficiency, reduce operating costs, strict compliance and risk control, and maintain monetary and financial stability.
Based on the above judgment, it is clear that：
Bitcoin class of network internal crypto-digital currency violates the logic of currency development and cannot become a real circulating currency, but only a new type of asset (virtual asset), which can be invested and speculated, but its price may fluctuate drastically and the risk is very high；
A supra-sovereign stable currency structurally pegged to a basket of fiat currencies, which sounds wonderful but is difficult to implement in a world where integrated governance is not yet in place and is largely a pipe dream；
Network stablecoins pegged to the equivalent of a single fiat currency are in fact a new type of token that can exist perfectly well as long as they can meet regulatory requirements, but they cannot subvert or replace fiat currency, but can only change the presentation and operation of the currency；
While the digitization of fiat currencies remains an inevitable trend, there may be different options of centralized and decentralized paths for its realization. In fact, under the unified supervision of the central bank and regulatory authorities, the network stablecoins independently promoted by different social organizations, which are equivalent to a single fiat currency, are the manifestation of the decentralized model of fiat currency digitization. From this OCC statement, it appears that the U.S. may prefer the decentralized model and may promote the international adoption of its digital currency through its worldwide network of global business organizations. The other is to launch a central bank digital currency operation system directly led by the central bank, such as the unified promotion of the development and operation of the digital RMB by the Chinese central bank, which is a manifestation of the centralized model of legal tender digitization. The centralized model may reduce duplication of social investment and focus on improving the efficiency of development and promotion.
Of course, the digitization of fiat currencies is easy to achieve domestically, while applying the digital currency operation system to cross-border payment clearing requires the coordination and cooperation of countries and international organizations, and is not wishful thinking, even for the US dollar digital stable coin.
Article from Wang Yongli (Former deputy governor of the Bank of China)
Translated by Yang(Mengyan Finance)