Bipartisanship has been in short supply in Congress so far this year, but a notable exception, it seems, has been made for stablecoins. The GENIUS Act, or to give it its full name, the Guiding and Establishing National Innovation for US Stablecoins Act, passed the House by 308 to 122 votes.
The new law sets out a generally reasonable-looking regulatory framework for stablecoins in the United States and could, potentially, lead to an increase in their use.
Stablecoins are a fairly recent innovation that sit at the much more, for want of a better term, ‘respectable’ end of a crypto-spectrum which sometimes veers into outright scams. Unlike cryptocurrencies, which see their value fluctuate, often wildly, stablecoins are usually pegged to a fiat currency and backed by real-world assets. A stablecoin pegged to the US dollar is, efficiently, a token issued by a stablecoin firm which, in theory at least, has enough deposits and safe government bonds on hand to redeem all of those tokens at par if holders desire to. This is, in many ways, similar on one level to an old-fashioned money market mutual fund. What differentiates stablecoins, according to their advocates, is the better technology embedded into the system. Because transactions involving stablecoins are recorded near instantaneously on central digital registers, they allow for low-cost money transfers without the long wait times often involved with traditional finance, especially when such transactions cross borders.
At the center of the collapse was Terra’s algorithmic stablecoin, UST, and a blockchain-based borrowing and lending protocol, Anchor. UST was marketed as the first genuine crypto-native stablecoin and was a distinguishing feature of the Terra network. Unlike other major stablecoins such as Tether or Circle, which are backed by off-chain liquid assets, e.g., treasuries, UST was not supported by off-chain collateral but by a smart contract that allowed an exchange of one unit of UST to $1 worth of Terra’s native currency, LUNA, and vice versa. In economic terms, UST was like infinite maturity convertible debt with a face value of $1 backed by LUNA.
Under the GENIUS framework, US dollar stablecoins require traditional assets as backing.
At present, despite strong growth in recent years, stablecoins essentially serve three main purposes. They are widely used as part of the wider cryptocurrency ecosystem to purchase cryptocurrencies, although over the last 18 or so months, the growth of stablecoins does seem to have decoupled from the growth of cryptocurrency transactions. In states marked by low trust in the government and traditional banking, together with high inflation – such as Nigeria and Turkey – they have begun to carve out a role as a substitute for fiat currencies. And then there are cross-border transactions. Sending a remittance via a stablecoin can often cost just a third (or sometimes even less) as much as using a wire transfer.
Despite the new US regulatory footing, not everyone is convinced that the growth of stablecoins is a useful development. European policymakers in particular fret that stablecoins could draw money away from the existing banking system, undermining both financial stability and, potentially, the power of central banks. The European Central Bank is instead working towards launching its own digital Euro. Others worry that stablecoins might prove vulnerable to runs or that their use can mask criminal activities.
This week, the Clark Center’s own Finance Experts Panel offered their own views. Asked first whether ‘the markets for consumer and business payment services would be substantially more efficient if payments by stablecoins (privately issued digital tokens pegged to a fiat currency) became an accepted alternative to traditional payments’, the experts were sceptical but divided.
Weighted by confidence, 9% of respondents strongly disagreed, 38% disagreed, 29% expressed uncertainty, and 24% either agreed or strongly agreed. As Darrell Duffie of Stanford, who strongly agreed, put it ‘If stablecoins become widely accepted (which is not all that likely), the added competition for banks would increase efficiency. Bank-railed payment services would improve and interchange fees for credit cards would decline significantly’. On the other hand, Jonathan Parker of MIT Sloan countered that ‘There are extremely well-developed payments rails using traditional ledgers and currencies. Stablecoins have no technological advantage, and blockchain based coins are less efficient. They have only a regulatory advantage. MMMFs regulated like stablecoins would be more efficient’.
The panel was then asked whether ‘ten years from now, stablecoins will account for a substantial share of payment flows and deposits in the global banking system’?
Talking about the future is also tricky, and the results were, perhaps, unsurprising. Weighted by confidence, 75% of respondents were uncertain – an unusually high number. But given that answering that question involves not only a good sense of how the technology will develop but also how regulatory systems across the world will react and how consumer and business behaviour will react, the high degree of uncertainty is to be expected.
The US had made a major step towards normalising stablecoin usage. Whether or not there is much follow-through remains to be seen.
