Crypto giant Circle has announced its intention to become a bank, fully regulated by the Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC.
Why it matters: We’re still a very long way from this happening. But if it does, Circle’s USDC stablecoin could become a de facto central bank digital currency.
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How it works: Circle’s dream is to become a narrow bank — one that eschews fractional-reserve banking entirely, and instead places all deposits on reserve at the central bank.
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Only banks can open accounts directly at the central bank, which credits them with pure money.
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In Circle’s case, the “depositors” would be holders of USDC, and the collateral backing up USDC would be the money on deposit at the Fed. Circle would pocket for itself the interest that the Fed pays on bank reserves.
The big picture: If the dream were to become reality, then Circle would effectively be issuing a cryptocurrency backed by the Fed itself — for all intents and purposes, a central bank digital currency, or CBDC.
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If Circle were allowed to do such a thing, then presumably other banks would be, too, and they would rapidly start competing with each other to pass through most or all of the interest that the Fed pays on reserves.
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Buying those stablecoins would be tantamount to having money on deposit directly at the Fed.
Between the lines: A would-be bank called TNB has tried to do narrow banking in the U.S. and has gotten nowhere. The Fed doesn’t like the idea, for reasons well-glossed by Bloomberg’s Matt Levine in 2019.
Be smart: Circle chief strategy officer Dante Disparte tells Axios that the company hasn’t yet even properly initiated the process of applying to become a bank; it’s just announced its intention to do so. Disparte says they’re willing to do “whatever the policymakers want.”
The bottom line: Most assets at most banks are loans that can, in theory, default. That’s also true of Circle’s assets, right now — they’re mostly commercial paper and other low-risk loans.
Go deeper: Central banks are headed toward digital currencies
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