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Fed's Christopher Waller Endorses Stablecoins, Argues They Can Help Solidify the USD Dominance

Waller says the introduction of digital USD will have a global impact with positive implications for the United States 

Federal Reserve Governor Christopher Waller highlighted the integral role of U.S. dollar-denominated stablecoins in decentralized finance (DeFi), potentially cementing the dollar's supremacy as the global reserve currency. Speaking at a central banking-focused conference on February 15, Waller pointed out: 

“About 99% of stablecoin market capitalization is linked to the U.S. dollar.”

Waller addressed the speculation around cryptocurrencies like Bitcoin possibly usurping the U.S. dollar's reserve currency status. He countered this by emphasizing the predominant use of stablecoins, pegged largely to the dollar, in most DeFi transactions. 

“People often conjecture that cryptocurrencies like Bitcoin may replace the U.S. dollar as the world’s reserve currency,” 

Waller noted, adding:

“most DeFi trades use stablecoins largely linked to the dollar.”

Highlighting the dominance of the U.S. currency in the crypto realm, he remarked: 

“Crypto-assets are de facto traded in U.S. dollars. So, it is likely that any expansion of trading in the DeFi world will simply strengthen the dominant role of the dollar.” 

This assertion underscores the significant impact stablecoins have in reinforcing the dollar's position in the global market.

Waller's observations come at a time when Tether (USDT) and USD Coin (USDC), the two largest stablecoins by market cap, dominate 90% of the $139.5 billion total stablecoin market cap. 

Challenges and regulatory outlook for stablecoins

Despite the positive outlook on stablecoins reinforcing the U.S. dollar's global reserve status, Federal Reserve Governor Christopher Waller also acknowledged the potential challenges ahead. Waller conceded that the "rapid growth" of the crypto sector might pose a threat to the dollar's dominance, yet he remains optimistic. He stated:

 "I do not expect to see the U.S. dollar lose its status as the world’s reserve currency anytime soon,” 

Reinforcing his view despite potential threats: 

“Recent developments that some have warned could threaten that status have, if anything, strengthened it, at least so far.”

After over 20 months of deliberations, a consensus is nearing with House Financial Services Committee Chair Patrick McHenry and Representative Maxine Waters expressing optimism. Waters told Politico on February 7: 

“We’re working on stablecoin; we’re getting very close.”

Fed Chair Jerome Powell previously emphasized the need for a "robust federal role" in overseeing stablecoins, categorizing them "as a form of money." 

Concerns about stablecoins introducing instability into the U.S. financial system have been raised by the Federal Reserve Banks of Boston and New York. Such apprehensions underline the delicate balance regulators aim to strike between fostering technological advances in finance and ensuring the stability and integrity of the financial system.