In a recent speech and interview with the Institute of International Economic Law at Georgetown University, current Acting Comptroller of the Currency Michael J. Hsu gave numerous remarks on the architecture of stablecoins.
According to the Comptroller, the architecture for a stablecoin system can be viewed through the lens of three key policy issues:
- Stability
- Interoperability
- Separability
Stability
One of the greater concerns, in both the crypto community as well as financial regulators and government, is the value stability of the crypto asset. No one wants a failure of one cryptocoin to cause an electronic bank run that in turn causes the value of other crypto coins to plunge. Regulators must therefore balance the need for stability and regulatory control with the need to allow innovation in the crypto marketplace.
Comptroller Hsu stated that if a stablecoin entity were tightly limited to only issuing stablecoins and holding reserves to meet redemptions, he would agree that the need to meet all bank regulatory and supervisory requirements would be overly burdensome. Therefore, if the activities and risk profile of a stablecoin issuing entity could be narrowly prescribed, he could see a tailored set of bank regulatory and supervisory requirements balancing stability with efficiency. However, the wider the variability in regulatory requirements allowed, the more likely a risky issuer goes bankrupt, which would spark the fire of contagion across its crypto peers.
Interoperability
As Comptroller Hsu noted in his remarks, most crypto use cases currently revolve around trading rather than around payments, so the question of interoperability has not been critical in the current crypto marketplace, as stablecoin holders can trade one stablecoin for another. However, in a Web3 world, the issue of interoperability is likely to become more significant as consumers try to make payments with their stablecoins. Think of the early days of Paypal, one could only pay using Paypal if the other side of the transaction also had Paypal.
The larger stablecoins exist across multiple blockchains such as Algorand, Ethereum, Solana, and Tron, which are not interoperable, as they are written in different code and have different cryptography that prevents them from being fungible across blockchains. Imagine that you’re in the fiat cash world and you have a stack of $50 bills but can’t exchange them for $5s.
Recall the frustration of being at a fast-food restaurant, unable to buy a dollar meal because they won’t accept anything larger than a twenty-dollar bill, making your pocket full of fifty-dollar bills useless and your stomach empty. In the crypto stablecoin world, the equivalent would be owning a USDT token that is native to the Ethereum blockchain and needing to make a payment in a USDT token that is native to the Tron blockchain. Even though the same company, Tether, issued both stablecoins, and they’re both worth $1, and you’re trying to make a payment in the same city/state/country, you cannot do so because the two blockchains are not interoperable.
As noted by Comptroller Hsu, the resolution would be to implement a cross-chain solution, but these have proven to be highly vulnerable to hacking.
Similar to how EBay greatly encouraged buyers and sellers on their site to use Paypal for payments, consider Libra/Diem stablecoin that was issued by Facebook. Users’ concerns about Facebook’s control over purchases with its own stablecoin raised even more concerns as Libra/Diem lacked interoperability with other stablecoins. If Facebook users could use other stablecoins on the platform, why bother with Libra/Diem, and if they could use other stablecoins, why bother with Libra/Diem? From Facebook’s standpoint, why bother to develop Libra/Diem if other stablecoins would be freely convertible?
To avoid the fragmentation of stablecoins and what he deemed “walled gardens,” Comptroller Hsu deemed a Central Bank Digital Currency (CBDC) necessary to allow interoperability of stablecoins, the US Dollar, and the general openness and inclusion desired in a blockchain-based digital future as Web3 takes over.
Separability
Related to the other two architectural features of stablecoins is the issue of stablecoin issuers.
Already, Stablecoin issuers and crypto exchanges have paired off in the marketplace as shown below:
| Stablecoin Exchange | Stablecoin Issuer | Stablecoin |
| Coinbase | Circle | USDC |
| FTX | Tether | USDT |
| Binance | Paxos | BUSD and USDP |
The promise and value of blockchain-based money are that the currency is always on, irreversible, programmable (think Smart Contracts), and settles in near real-time. With these benefits, however, come risks, especially if commingled with traditional banking and finance. While banks have controls and excess liquidity to handle intraday credit risk and intraday liquidity risk, these controls would have to be greatly enhanced to handle long weekends of always-on, irreversible, real-time settlements. Imagine a large, Significantly Important Financial Institution unable to make payments on Monday because a run over the weekend and overseas causes the banks’ funds to run out. As the government, whether the FDIC or Federal Reserve, provides the stop gap liquidity to banks, the spill-over effect could significantly damage the US Dollar and the credit worthiness of the US government.
While one solution posed by Comptroller Hsu would be to have blockchain-based activities such as stablecoin issuance housed in a standalone bank-chartered entity legally separate from the insured depository institution (IDI) subsidiary and other regulated affiliates, he acknowledges that the architecture and related policies created must protect against this risk.
Watch Michael Hsu’s speech and interview with the Institute of International Economic Law at Georgetown University here.
