Letter: The Fed’s seigniorage is also under attack

Published in the Financial Times.

Ignazio Angeloni writes that “tokenised deposits look more promising” than stablecoins (“Stablecoins or tokenised deposits? The jury’s out”, Letters, July 31).

If a tokenised deposit can stay in circulation, making payments for an indefinitely large series of transactions, it has become the functional equivalent of paper currency issued by private banks. This was historically a key business of private banks but got monopolised by central banks — in the US case, by the Federal Reserve. Perhaps its monopoly will be broken?

Stablecoins are also competitors with the Federal Reserve, especially competing with the Fed’s $100 bills used around the world for informal (or illegal) payments.

Thus both banks with tokenised deposits and stablecoin issuers become competitors to the Fed.

Issuing currency — via seigniorage — is by far the most profitable activity of central banks, generating profits for the Fed of about $88bn a year at current interest rates. How much of this profit could be captured by private issuers as the Fed’s circulating currency monopoly faces competition?