Generally speaking, the cryptocurrency market is not for the faint of heart. Roller-coaster fluctuations and volatility might be considered an appropriate price to pay, given crypto’s limited supply and absence of a central regulatory system – but it also a hurdle to many.
Enter stablecoins. First introduced in 2018, stable coins are another form of virtual currency, which run on blockchains, but whose values are pegged to traditional (stable) reserve assets such as fiat currencies (the US dollar, for example), or commodities, such as gold.
Coinbase explains that they are designed to reduce the volatility relative to unpegged cryptocurrencies, such as Bitcoin. Basically, they can be viewed as a bridge between the cryptocurrency sphere and the fiat currency sphere.
Leaders in the stable coins sector today are Tether (USDT) USD Coin (USDC), and Pax Dollar (USDP), as well as various others such as Binance USD (BUSD), and TerraUSD (UST). Like fiat currency – these coins are minted, not mined.
According to the abovementioned Coinbase report, “Stablecoins are open, global, and accessible to anyone on the internet 24/7. They’re fast, cheap and secure to transmit. They’re digitally native to the internet and programmable.”
Sounds great, what can go wrong? Well, according to a report issued by the Department of the Treasury, “speculative digital asset trading…presents risks related to market integrity and investor protection” which encompass “possible fraud and misconduct, including market manipulation, insider trading, and front running, as well as a lack of trading or price transparency.”
Earlier this year, The President’s Working Group on Financial Markets, recommended that Congress act promptly to enact legislation to ensure that payment stablecoins and payment stablecoin arrangements are subject to a federal prudential framework on a consistent and comprehensive basis.
As popularity is growing, so are legislators’ concerns
The stablecoin popularity is on the rise. Just last week, for example, Meta (formerly Facebook) announced a pilot program that will allow users to send and receive money using the corporation’s digital wallet, Novi (which uses USDP, or the Pax Dollar), via WhatsApp.
Last Wednesday, CEOs of six major cryptocurrency companies testified before the House Financial Services Committee, providing legislators with a five-hour “Crypto 101” crash course. The hearing marked the first crypto hearing the committee has had since the Bitcoin whitepaper was published, 13 years ago.
At the hearing, the crypto execs called for tailored legislative solutions, rather than forced compliance with existing regulations. The stablecoin issue was also discussed at great length, with Congressman Warren Davidson calling it “the lowest-hanging fruit.”
Another hearing took place yesterday (Wednesday), this time dedicated exclusively stablecoins. Held before the Senate Banking, Housing and Urban Affairs, it was titled “Stablecoins: how do they work, how are they used, and what are their risks?”
Consistent with general Democratic skepticism on cryptocurrency, Chairman Sherrod Brown (D-OH), evoking the 1929 and 2008 market crashes. “So far, what happens in the crypto markets has stayed in the crypto markets. But stablecoins create a very real link between the real economy and this new fantasy economy,” he said.
“To a whole lot of people, that seems like a fantasy economy too. But a Big Tech scheme that makes it easy for hardworking Americans to put their money at risk isn’t the answer.”
Ranking Member Patrick J. Toomey (R-PA) offered a different point of view. “Unlike volatile cryptocurrencies like Bitcoin, stablecoins don’t fluctuate in their dollar price,” he said, adding that “In recognition of the potential of these new capabilities, any regulation should be narrowly tailored and designed to do no harm.”
First witness was Alexis Goldstein, Director of Financial Policy at the Liberal DC-based think tank Open Markets Institute. She provided a lengthy review of the current market situation, framing stablecoins as an “integral part of speculative cryptocurrency trading, as nearly 75% of crypto asset trading involved a stablecoin.
A threat to national security, a competitive oppportunity, or both?
“Stablecoins are also central to the functioning of decentralized finance (DeFi), a section of the cryptocurrency markets largely out of compliance with Know Your Customer (KYC), Anti-Money Laundering (AML), Countering the Financing of Terrorism (CFT), and sanctions checks.”
Goldstein also cited national security concerns regarding stablecoins, mentioning that “An October report from (FinCEN) found that DeFi was being used to convert ransomwarerelated payments to other types of cryptocurrency.”
“There are many investor, national security, and usability concerns with both algorithmic and asset-backed stablecoins,” concluded Goldstein. “Congress should continue to examine if there are regulatory gaps that require new legislation to ensure consumer and investor protection as it relates to stablecoins, and regulators should continue to monitor stablecoins and ensure compliance with existing laws.
Dante Disparte, Chief Strategy Officer and Head of Global Policy for Circle – the sole issuer of USDC, said this coin supports the extensibility of the U.S. Dollar in a competitive, always-on global economy”, then went on to highlight the various advantages of stablecoins.
“While some argue the US may lose the digital currency space race if it fails to issue a Central Bank Digital Currency (CBDC), I argue that we are winning this race because of the sum of free market activity taking place inside the U.S. regulatory perimeter with digital currencies and blockchain-based financial services,” said Disparte. “The sum of these activities are advancing broad US economic competitiveness and national security interests.”