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Illustration: Annelise Capossela/Axios

Stablecoins — digital currencies linked in a fixed 1-to-1 exchange rate to real currencies like the dollar or the euro — face an existential threat from the world's central banks.

Why it matters: If the future of currency is digital, then stablecoins offer version 1.0 of what a digital dollar might look like. But they are also under-regulated, systemically risky, and uniquely vulnerable to the rise of official central bank-backed digital currencies, or CBDCs.

Where it stands: Stablecoins have been growing fast. The two largest, Tether and USDC, are now worth more than $100 billion combined, up from less than $25 billion at the beginning of the year.

  • The quality of the collateral backing Tether, and even the existence of that collateral, is worryingly vague. Fears remain that if Tether is revealed to be a Ponzi, its collapse could bring down bitcoin and the whole world of cryptocurrency.
  • The dream of stablecoins is that they will be used for payments — and that's already beginning to happen, in a very small way.
  • Regulators have taken note: The Bank of England, for instance, in a new discussion paper, has made it clear that stablecoin payments need to be regulated just as assiduously as anything passing through the banking system.

The big picture: A CBDC is the ultimate stablecoin. Rather than forcing users to trust that some private company is backing its coins with real currency, CBDCs are directly backed by the full faith and credit of the sovereign.

  • Stablecoin defenders, like Circle, which issues USDC, say that CBDCs could destabilize the banking system by causing deposits to migrate from banks to retail accounts held directly at the central bank.
  • Yes, but: CBDCs can easily be set up as two-tier systems where banks issue their own wallets and individuals can't hold direct accounts with the central bank.

Between the lines: Early CBDCs have been introduced either in countries where the government desires visibility into every commercial transaction (China), or in countries where traditional banking and payments are extremely difficult for topographical reasons (the Bahamas).

  • The Fed is moving slowly on creating its own digital currency — this is an area where there's no real first-mover advantage, and where countries can learn a lot from those who go before them.

The bottom line: Stablecoin issuers aren't going to face direct competition from the U.S. government any time soon. But, in 2008, money-market funds almost brought down the financial system. No regulator wants to take the risk that stablecoins might similarly become too big to fail.

Go deeper

El Salvador buys 400 bitcoin ahead of making it legal currency

President Nayib Bukele in the Legislative Assembly building in San Salvador, El Salvador, in June. Photo: Camilo Freedman/Bloomberg via Getty Images

El Salvador bought its first 400 bitcoins on Monday, and President Nayib Bukele pledged to buy "a lot more" ahead of adopting the cryptocurrency as legal tender.

Why it matters: El Salvador will become on Tuesday the first country to formally adopt bitcoin — marking the "biggest test" the digital currency has faced in its 12-year history, per Bloomberg.

Facebook admits "trust deficit" as it looks to launch digital wallet

Photo illustration: Axios Visuals. Photo: Andrew Harrer/Bloomberg via Getty Images

Facebook says it's finally ready to launch its most ambitious new product in years: a digital wallet called Novi. But the man leading the charge says Washington could stand in its way.

Why it matters: Facebook needs to convince regulators skeptical of its power that it's a good idea. "If there's one thing we need, it's the benefit of the doubt," Facebook's David Marcus said in an interview with Axios. "[W]e're starting with a trust deficit that we need to compensate."

Chris Cuomo accuser: On-air "hypocrisy" spurred report

Journalist Chris Cuomo. Photo: Gilbert Carrasquillo/GC Images

A woman who accused fired CNN journalist Chris Cuomo of sexual misconduct said Sunday she decided to come forward after learning of his comments about women who made similar accusations about his brother. He denies her allegations.

Why it matters: Her attorney Debra Katz said in a statement that she heard "the hypocrisy" of his on-air words about his brother, former New York Gov. Andrew Cuomo, and was "disgusted by his efforts to try to discredit these women," so "retained counsel to report his serious sexual misconduct against her to CNN."

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