Cryptocurrency growth fuels stablecoin demand, Fed governor says

Growth in the cryptocurrency ecosystem is fueling demand for stablecoins, Lael Brainard, who is a member of the Federal Reserve Board of Governors, said Friday. 

The market capitalization of cryptocurrencies grew from less than $100 billion five years ago to as high as $3 trillion in November and it is currently around $2 trillion, she said during a speech at the US Monetary Policy Forum in New York.

Stablecoins, which are digital coins whose prices are stabilized to a traditional currency, saw its supply grow nearly six-fold from $29 billion in January 2021 to $165 billion in January 2022, she added.

In addition, stablecoins are being used as collateral on decentralized finance and other crypto platforms, as well as in facilitating trading and monetization of cryptocurrency positions on and between crypto and other platforms, she noted.

"In the future, some issuers envision that stablecoins will also have an expanded reach in the payment system and be commonly used for everyday transactions, both domestic and cross-border. So it is important to have strong frameworks for the quality and sufficiency of reserves and risk management and governance," she said.

Brainard, who was nominated by President Joe Biden to serve as vice-chair of the Fed and is awaiting confirmation, called for the central bank to prepare for its own central bank digital currency (CBDC).

A CBDC, which is a digital currency issued by a central bank, should protect consumers' data and privacy, be widely transferable, and ensure identity verification to combat money laundering and funding of terrorism, she said.

"A CBDC -- depending on its features -- could be attractive as a store of value and means of payment to the extent it is seen as the safest form of money," she added. "The coexistence of CBDC alongside stablecoins and commercial bank money could prove complementary, by providing a safe central bank liability in the digital financial ecosystem."