The Senate Committee on Banking, Housing, and Urban Affairs will convene a hearing on stablecoins today. Congress should focus on the many benefits this form of cryptocurrency can provide to the larger ecosystem and to lower income individuals. The supposed risks presented by stablecoins are distant, speculative, and overblown.
Stablecoins are “a type of digital asset generally designed to maintain a stable value by linking its value to a national currency or other reference assets.” The top stablecoins are overwhelmingly pegged to the U.S. dollar, thanks to the dollar’s strength as a global store of value. The stablecoin market has exploded this year from $30 billion to $154 billion.
Stablecoins play a vital role in the cryptocurrency ecosystem, which excessive regulation would thwart. Although they only represent around 5 percent of total cryptocurrency, they facilitate more than 75 percent of crypto trading in virtual marketplaces. By one estimate, 80 percent of Bitcoin trades involve the stablecoin Tether on one side of the transactoin. Stablecoins mitigate risk in trading and settlement. They also provide a safe harbor for traders during increased volatility.
Because of this, stablecoins provide value well beyond their book value. They can garner interest of 8 percent APY or higher, compared to an average of 0.06 percent in a traditional savings accounts. This provides a financial boon for lower-income individuals.
Critics point to fines paid by stablecoin issuer Tether to the State of New York and the Commodity Futures Trading Commission as proof more oversight is needed. The President’s Working Group on Financial Markets, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency have called for the most popular stablecoin issuers to become insured federal depository institutions and subject to a “federal prudential framework on a consistent and comprehensive basis.”
That would stifle stablecoin growth with little benefit. Despite alleged shady accounting by one issuer, the stablecoin market has proved resilient and the major issuers now publish their reserves on various schedules. Furthermore, despite their rapid growth, stablecoins do not pose systemic risks. As the Cato Institute’s Norbert Michel points out, total stablecoin volume pales compared to dollars ($2 trillion), treasuries ($4.5 trillion), money market funds ($5.4 trillion), or equities ($40.7 trillion).
Stablecoins embody a vibrant and growing market that provides value and income opportunities. They are already regulated in several ways, including through state money transmission laws, state-level trust company charters, as well as federal options. Smothering them under a comprehensive federal framework would thwart competition and innovation without any corresponding benefit.