USDC stablecoin issuer Circle: A 'shadow bank' to be listed on the NYSE?

With more regulators watching stablecoin growth, the Federal Reserve chairman said they are close to weighing in on the role that crypto will have on the US money supply. Circle’s listing through the SPAC merger has raised concerns about transparency. 

Circle to go public

Circle plans to go public via the New York Stock Exchange (NYSE) through its merger with NYSE-listed Concord Acquisition Group, a special purpose acquisition company (SPAC). The move may be considered as a back door for entering the stock market, and it has elicited a mixed response from regulators in China and the US Fed chairman Jerome Powell. 

Powell said, 

Stablecoins certainly have some advantages in terms of faster payment systems and have some attributes of CBDCs but there are some risks with stablecoins right now. I think the issue is that stablecoins are a lot like money market funds or bank deposits or a narrow bank. You wouldn’t need stablecoins, you wouldn’t need cryptocurrencies if you had a digital U.S. currency, I think that’s one of the stronger arguments in its favor.

Powell’s argument implies that the need for stablecoins and cryptocurrencies is likely to be eliminated once a central bank digital currency (CBDC) is launched. A similar take on fiat pegged cryptocurrencies comes from the People’s Bank of China, which is currently running a pilot for the digital Renminbi. 

The PBoC warned investors that stablecoins pose serious risks to global financial systems while stressing that China's CBDC is devoid of such issues. The pilot program may be a precursor of what the Fed has in store for a digital US dollar since stablecoins are being watched intently and scrutinized by both authorities. 

Despite the regulators' stance on stablecoins, these digital assets have a clear appeal for investors as their market capitalization is currently more than $110 billion, according to CoinGecko. Moreover, the news of Circle’s stock(ticker CRCL) getting listed on the NYSE suggests that stablecoins are heading towards mainstream adoption, sparking a debate on the role of this new asset class in the global economy. 

Rohan Grey, assistant professor of law at Willamette University, voiced his concerns on stablecoins: 

Let’s be very clear. These actors are issuing a deposit, version 2.0. They should be regulated as banks, not [via] the hodge-podge, barely regulated money transmitter framework they’re currently operating under.

Grey emphasized the role of a bank in the economy and considers that private entities issuing stablecoins are playing the role of a ‘shadow bank’. The term is derived from the 2008 financial crisis where institutions were issuing deposits but they were regulated like a bank. 

Issuing instruments without regulation and authority means that the issuers create something that has the properties of money, and can be used as a medium of exchange or a store value. At the same time, it lacks oversight from policymakers and is not safeguarded, which could lead to a loss of funds invested in the instrument, according to Grey.

One of the major causes of instability in the lead-up to the 2008 financial crisis was that various actors which we now call ‘shadow banks’ were issuing instruments that were effectively deposited. But in US deposit law there’s a well-recognized and long-standing loophole: the definition of a deposit is as something a bank does. So if you’re not a bank, by definition what you’re issuing can’t be a deposit, even if it walks and talks and is functionally like one.

Stablecoin issuing entities can be likened to ‘shadow banks’ by Grey’s definition, which raises cause for concern among regulators. Regardless, trader sentiment seems to remain intact as the stablecoin supply on exchanges continues to climb up steadily.