New U.S. legislation, once signed into law, will bring stablecoins into the financial system.JUSTIN TALLIS/AFP/Getty Images
Three weeks ago, Patrick Collison said the quiet part out loud.
On stage at a technology symposium hosted by the New York Times, the chief executive of payments giant Stripe, where Mark Carney served as a board director, was asked about the future of the U.S. dollar in a digital world. In a rare twist, he acknowledged cryptocurrencies could actually make the dollar stronger.
“There’s an irony in crypto,” he said, “where one of the most important and consequential things it may end up enabling is the dollar’s greater success.”
The catalyst enabling this: new U.S. legislation, including the Genius Act, that embraces a type of cryptocurrency known as stablecoins as legitimate forms of payment.
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Historically, stablecoins such as USDC and USDT were used as intermediaries to transfer in and out of cryptocurrencies, without having to convert into U.S. dollars. But over time, their adoption has bled into traditional payments.
Crucially, they’ve become more intertwined with the existing financial system, particularly in countries with volatile currencies. An IT freelance contractor working in Southeast Asia or Turkey, for instance, may prefer to receive payment in a stablecoin that can easily be exchanged for U.S. dollars than in their local currency. Today, the volume of payment transactions involving stablecoins globally is multiples more than those using bitcoin.
The U.S. bills have been working their way through Congress and one, the Genius Act, is now on its way to the White House. Once signed into law, the evolution will be complete and stablecoins will be brought into the fold of the current financial system – one that has the U.S. dollar, and U.S. Treasury bonds, at its core.
For years, crypto zealots have talked about creating a brand new financial network. The exact shape of this was always up for debate. The most hard-core obsessives preached about stateless currencies, raising all sorts of questions about the role of nation states, central banks and national governments in a globalized world. Then Donald Trump, who has called himself the “crypto President,” won re-election and his family even created its own stablecoin, USD1.
Yet the legislation he will sign looks very different from what anarchists envisioned. Instead of permitting a decentralized system where commercial banks and central banks have less power to control the creation and storing of money, under the new laws, they may actually have even more power. Particularly in the United States.
Crucially, stablecoins in the U.S. will only be able to be issued by “permitted payment stablecoin issuers” that must be approved by federal or state regulators. As for foreign issuers, they can only sell stablecoins in the United States if the issuer is effectively held to the same standards as domestic issuers.
These issuers must also back every single token, or stablecoin, one-to-one with U.S. dollars in cash, U.S. Treasuries or overnight repurchase agreements (repos).
The obvious reason for this is to make sure money doesn’t go missing. During the COVID-19 pandemic, Tether, the world’s leading stablecoin issuer, faced scrutiny because it wasn’t clear if its client money was truly backed one-to-one, and TerraUSD, another stablecoin, collapsed because it was backed by cryptocurrencies whose values had plummeted.
But there is another reason, or at least benefit, to this rule – something government officials rarely talk about. Because stablecoin issuers will be buying lots of short-term Treasuries, it will help the U.S. government fund its growing annual deficits. (The government issues debt, in the form of Treasury bonds, to fill the gap in its funding shortfall.)
“By mandating stablecoin reserves to be held in U.S. dollars or short-term Treasuries, the GENIUS Act is expected to create structural demand for U.S. government debt and support domestic monetary sovereignty,” the law firm McMillan LLP wrote in a note to clients.
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Some crypto realists believe rules like these were always likely and that, ultimately, they will help these stablecoins take off because companies such as USDC-issuer Circle Internet Group, which just went public, will no longer have to operate in the grey. But now that there’s regulatory certainty, it will be on stablecoins to prove their worth.
For all the hype, stablecoins, under the new legislation, are mostly just another form of payment. When buying something online, you can currently pay with money directly from your bank account, or with your credit card. A stablecoin will just be another option – something Shopify Inc. SHOP-T is enabling for its merchants.
Because they’re simply another payment mechanism, Jamie Dimon, the chief executive of JPMorgan Chase & Co. JPM-N, the largest U.S. bank, hasn’t fully bought into the hype. “I don’t know why you’d want a stablecoin as opposed to just payment,” he said on an earnings conference call Tuesday.
But there are some potential benefits. Stablecoins may save shoppers money because their payment fees can be cheaper than those charged by banks and foreign-exchange intermediaries. The same is true for users sending money abroad.
But it’s still very early in the game, and fees could rise as stablecoins process more payments, and therefore have to invest more in things like anti-money-laundering systems. Plus, the banks aren’t sitting back, either. Despite Mr. Dimon’s confusion, JP Morgan is launching a stablecoin, and Citibank C-N and Bank of America BAC-N have said they will, too.
Stablecoin issuers are being granted the legitimacy they’ve long craved, but now they’ve got to fight the behemoths.