A top US banking regulator thinks stablecoins could “fundamentally alter” the traditional banking sector based on historical precedent.

In a new speech at the Brookings Institution, acting Federal Deposit Insurance Corporation (FDIC) chairman Martin J. Gruenberg compares the current digital asset space to the free banking era of the late 1800s and early 1900s.

“As pointed out in the [Financial Stability Oversight Council] digital asset report, ‘currency during the free banking era consisted of bank notes, that is, liabilities of individual banks payable in gold or silver if presented at the issuing bank. As many as 1,500 currencies circulated at any one time.’

This decentralized form of monetary exchange led to numerous bank runs and cycles of bank failures. While our financial system has advanced significantly over the past century, we would do well to keep our history in mind. It offers a valuable lesson about the risks of private money, both digital and physical, for the US financial system when we consider the more-than 21,000 crypto assets currently in existence.”

Gruenberg thinks stablecoins have the potential to be particularly disruptive to the existing banking landscape.

“Economies of scale associated with payment stablecoins could lead to further consolidation in the banking system or disintermediation of traditional banks. And the network effects associated with payment stablecoins could alter the manner in which credit is extended within the banking system – for example by facilitating greater use of FinTech and non-bank lending – and possibly leading to forms of credit disintermediation that could harm the viability of many U.S. banks and potentially create a foundation for a new type of shadow banking.”

The FDIC acting chairman argues that stablecoins should be backed dollar–for–dollar by high–quality, short-dated U.S. Treasury assets and only transact on “permissioned ledger systems with robust governance and compliance mechanisms.” He also thinks they should potentially be issued by banking subsidiaries to ensure they’re subject to proper financial regulations.

Earlier this year, Gruenberg said the risk evaluation of crypto asset-related activities was one of the “key priorities” for the FDIC in 2022.

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The post Stablecoins Could Massively Disrupt Traditional Banks, Says Acting Chairman of US Banking Regulator appeared first on The Daily Hodl.