Should Banks Be Creating Their Own Stable Coins?

I am a proponent of banks introducing the ability for customers to buy and sell cryptocurrencies directly so that they can more easily move money internationally.  A number of banks that have done that already are now thinking about what they can do next.  It seems the path often leads them down the decision to build their own stable coin (since money transfers using crypto not subject to price fluctuations is more palatable for the average user). 

It seems like a logical step, right?  Why do I want to use someone else’s ball to the game when I can bring my own?  However, this is an instance where I think it’s better to have someone else bring the ball and banks would be better off focusing on getting better at the sport, not buying their own equipment. 

The reality is that banks are subject to huge amounts of bureaucracy and regulation.  While this is good for consumers, it means the reality is that most banks can’t be as agile as fintechs – even if they do have the best intentions. 

If each bank wants to have their own stable coin, imagine the fragmentation that’s going to happen? And how many currency pegs are they going to have, G7 plus their local one (if it differs)?  The use of stable coin as a payment method is only possible if there’s enough liquidity in the system when customers want to buy and sell (read: someone on the other side of the equation, i.e., someone who will sell when you want to buy, and who will buy when you want to sell).  If there are 1000s of different stable coins in the market, it will be difficult for banks to maintain liquidity and all of the bank’s capital will go towards making sure it can stay afloat (which has a negative opportunity cost for the bank as it will inevitable mean the capital is less flexible to be deployed elsewhere). 

I can see it maybe making sense in the near-term until we have widespread adoption and crypto no longer evokes feelings of a “get rich quick scheme”.  But in the long-term, I don’t believe this amount of fragmentation would work.  So, sure, maybe your bank could be the lucky one to survive the consolidation that would inevitably happen.  But my money is on the more agile fintech, and most likely a lot of banks would have spent a lot of money for little long-term benefit for your shareholders. 

Instead, I’d say jump on the bandwagon to support the fintechs and the central banks in their currency digitization efforts.  Maybe then you’ll have the capacity to start advocating for better regulatory capital treatment and can expend efforts on implementing practices that lower operational and compliance costs. 

I am a big proponent that banks shouldn’t be trying to play the same game a fintechs – they should be playing a different game (which arguably can’t be the same game it was in the past).  Banks’ key value proposition for customers and shareholders relative to fintechs is trust, strength, and stability.  If banks lose this then they have no chance to win a game against the fintechs. 

Thoughts and opinions are purely my own, no ChatGPT here.  The above is just a brief conceptual summary, for more specific details, feel free to use ChatGPT.  I’d suggest a prompt along the lines of:

I work for [insert bank name] and am wondering if we should introduce an [insert currency]-backed stable coin.  Can you tell me if any other banks have an [insert currency]-backed stable coin, if so when did they launch and share any what public details that are available about the coin, its implementation and its adoption. 

Can you please check if there is any published regulatory guidance from [insert regulatory] which specifies the regulatory requirements to launch a stable coin, including whether regulatory permission is required, what the application process looks like, what requirements there are.

Please prepare an executive project summary which would includes high-level steps required, expected costs and other requirements, and timeline for implementation.  Please review and add any other crucial information which I may have missed asking for.