As central bankers gather for the 49th annual economic symposium in Jackson Hole, Wyo., starting Thursday evening, Kansas City Fed president Jeff Schmid warned that the rise of innovation in payments from stablecoins to blockchain and instantaneous payments could be disruptive….
think we’re going to find that not only is this, from an innovation standpoint, very transitional, it’s going to be very disruptive too,” Schmid said in an interview with Yahoo Finance. The theme of this year’s gathering focuses on financial innovation in payments and the implications for monetary policy. “I think we need to prepare,” Schmid said. “We’re going to be talking in the next decade more about sources of liquidity and duration, maybe more than we talked about capital, because at the end of the day, that $5 [trillion] or $10 trillion that we move a day is going to over time become instantaneous, and that’s going to be a change in the system at large.” If payments become instantaneous and settle instantaneously, Schmid wonders, how does that impact liquidity, and what’s the nature of assets backing the instruments?
One of those innovations — stablecoins — is mandated by a newly passed law to back all outstanding payment stablecoins on a strict 1-to-1 ratio with highly liquid, safe assets. Those assets include short-term US Treasurys, physical cash, or deposits. Since stablecoins are mandated to be backed by short-term liquid assets, including T-bills, as the market grows, that could increase demand for stablecoin issuers holding Treasurys.
How stablecoins work Schmid said that could have implications for financial stability. That’s where the Fed comes in. “What do we have to do relative to supervisory regulation just around how liquid a bank is?” said Schmid. “We’ve got architecture like that now, but you think about things like the Silicon Valley Bank experience and how fast that went from a capital impairment to a liquidity crisis, and that’s the challenge instant payments are…