Currently, there are approximately $250 billion worth of stablecoins in circulation. If the House approves the legislation, which has previously seen a similar version known as the STABLE Act pass, we can expect a significant influx of new issuers in the market. Major retailers such as Amazon and Walmart, along with others in the payment ecosystem, are reportedly preparing to launch their own tokens. Additionally, large U.S. banks and tech giants are likely to join this trend, while many entrepreneurs are anticipated to enter the burgeoning sector.
The Trump family’s notable investments in cryptocurrencies further highlight the growing interest in this market. A Citigroup report from earlier this year projected that stablecoin issuance could soar to $3.7 trillion by 2030, while an analysis by the U.S. Treasury estimated that around $2 trillion would be in circulation by 2028.
The advantages of adopting stablecoins are clear. They have the potential to eliminate intermediaries in finance, as the cryptocurrency ecosystem operates on a peer-to-peer basis. This shift could render merchant fees, interchange fees, and wire transfer charges obsolete, along with the delays associated with fund clearance. Such benefits explain why retailers are keen on stablecoins, as they pose a significant threat to traditional credit and debit card companies.
U.S. Treasury Secretary Scott Bessent has expressed optimism regarding the implications of stablecoins for the U.S. dollar and Treasury market. The dollar and U.S. Treasury securities are already the primary assets used to back stablecoins, and it is expected that these will remain the preferred assets for tokens created under the proposed legislation. This could generate substantial demand for the dollar and Treasury securities, reinforcing the dollar’s status as the world’s leading currency and potentially reducing the U.S. government’s borrowing costs.
However, the majority of the funds supporting these stablecoins would likely originate from conventional financial institutions, such as banks and money market funds. This means that existing U.S. dollar assets would simply be redirected rather than sourced from new avenues. This transition raises an important concern: deposits might be shifted from highly regulated, insured environments into a less regulated framework where funds lack insurance.
Unlike traditional bank deposits, which are supported by the Federal Reserve, stablecoins would not have a lender of last resort. This absence of support raises several criticisms, including diminished safeguards against misuse for illicit activities and the inability to create money like banks do. Moreover, unlike the universally accepted U.S. dollar, there is no assurance that a $1 stablecoin will consistently retain its value or be recognized as a valid medium of exchange.
If the anticipated growth in stablecoin issuance materializes, it could adversely affect the stability of the U.S. banking system and potentially others. This shift could lead to the conversion of stable and federally insured retail deposits into more volatile and uninsured wholesale deposits, echoing the regional banking crisis in the U.S. that was sparked by a run on deposits at Silicon Valley Bank in 2023.
Under the proposed legislation, stablecoin issuers would need to maintain $1 in easily liquidated assets for every $1 of stablecoins issued. While it is relatively straightforward for issuers to acquire U.S. Treasury bills or cash-backed repurchase agreements to secure these deposits, a sudden surge in redemption requests could necessitate an urgent liquidation of these assets. Such a scenario could lead to losses due to forced sales, as some existing stablecoins have traded below their intended value.
The Genius Act explicitly states that stablecoins will not be government-backed, nor will they have access to Federal Reserve facilities. However, in the event of a widespread collapse within the sector, resulting in massive sell-offs of Treasury securities and bank deposits, there would likely be immense pressure for governmental intervention, especially if the sitting president had substantial investments in the stablecoin market. Although the act prohibits members of Congress and the executive branch from owning or issuing stablecoins, an attempt to extend this prohibition to the president and vice president was unsuccessful.
Another significant concern surrounding the act is its potential to recreate a historic precedent reminiscent of 19th century America, where virtually anyone could establish a bank and issue currency backed by collateral. Unlike the universally trusted U.S. dollar, there is no guarantee that a stablecoin pegged to the dollar will maintain its value or be widely accepted.
Fiat currencies are interchangeable, whereas crypto assets are not. Each stablecoin may be supported by a variety of assets, leading to differing vulnerabilities and responses to external pressures among issuers. Without continuous, real-time auditing of every stablecoin issuer, it is challenging to establish the same level of trust found within traditional banking and payment systems.
By endorsing stablecoins and lending them credibility, U.S. lawmakers are integrating cryptocurrency into the mainstream financial and payment systems, which could fragment these systems to some extent and introduce a new source of potential instability. Only time will reveal whether this approach proves to be beneficial.
