U.S. dollar stablecoins — digital assets that are supposed to always equal the value of a greenback — are growing more popular, and U.S. bank regulators are expressing more interest in reining them in.
Securities and Exchange Commission Chairman Gary Gensler has likened them
“Stablecoins are like money market funds, they’re like bank deposits, but they’re to some extent outside the regulatory perimeter and it’s appropriate that they be regulated — same activity, same regulation,” Powell told lawmakers.
Meanwhile,
Instead of circling the wagons, major stablecoin issuers like Circle (which issues USD Coin), Gemini Trust Co. (Gemini Dollar) and Paxos Trust Co. (which is behind Binance USD and the Pax Dollar) say they would welcome regulation.
“The backdrop here is as these get bigger and get more broadly used, they are going to bring a lot more regulatory scrutiny,” said Jeremy Allaire, CEO of Boston-based Circle. “Regulators are looking at this saying it has grown really fast and it has potential to be much, much bigger. What are the risks to holders of these digital tokens? What are the risks to how monetary policy works? What are the risks to national security? All these are totally legitimate questions.”
Use of stablecoins has soared in the past two years; the five largest issuers have more than $110 billion worth in circulation. Hong Kong-based Tether is the largest issuer, with $68 billion of its currency in circulation. The company did not respond to a request for an interview.
Some administration officials reportedly worry that stablecoins could be vulnerable to the equivalent of a bank run if large numbers of investors suddenly rush to redeem them, forcing sponsors to sell the assets at fire-sale prices and potentially putting stress on capital markets. Bank regulators are concerned about what’s backing stablecoins and what cybersecurity and anti-money-laundering steps their issuers take.
U.S. dollar stablecoins today are mainly used by crypto traders.
“When someone is trading crypto, they want to trade it against U.S. dollars because that's what most everything in the world is traded against,” said Walter Hessert, head of strategy at New York-based Paxos. “And when they want to trade crypto against U.S. dollars, it becomes untenable to trade it against dollars moving on banking rails that have limited hours and limited days versus the other asset that's moving 24-7. So they need those dollars on a blockchain.”
A smaller subset of stablecoin activity is crypto lending. And some firms are starting to build the ability to handle payments through stablecoin.
Circe’s Allaire said he’s encouraged that regulators at the Fed, the Treasury Department, the Office of the Comptroller of the Currency and the SEC are taking a closer look at this emerging sector.
“This in our view is a tremendous opportunity for very meaningful innovation, not just in banking and payments, but in economic infrastructure more broadly,” Allaire said. "This should be a strategic priority for the U.S. government: to figure out how to support the growth of this industry, how to make sure that the right level of risk management takes place, how does it fit within the existing regulatory framework?”
New laws are needed for stablecoins, digital asset exchanges, crypto lending and other corners of decentralized finance, he said.
“There's no OCC exam manual for crypto lending or stablecoins, but there's going to have to be,” Allaire said.
Circle has already been in the process of applying for a national bank charter to give payment networks, other financial institutions and corporations confidence in Circle's role as a fiduciary.
“The national commercial bank is among the most heavily regulated types of fiduciaries," Allaire said. "We see that, and we think that's important to the ultimate market.”
A bank charter would give Circle access to the Fed and automated clearing house networks. And it could help position Circle as a bridge between the decentralized finance movement and the financial establishment.
“There's this connection between the existing financial system and this new internet infrastructure,” Allaire said. “We want to be a company that brings those together and in an interesting way. We think that's really possible.”
Paxos and Gemini have trust charters from the New York State Department of Financial Services and say the department monitors their operations and stablecoins. They are subject to New York cybersecurity and anti-money-laundering laws.
The national regulators’ concerns are legitimate, said Sydney Schaub, general counsel at Gemini.
“Our token is designed with all those things in mind,” she said.
Schaub doesn’t think new national laws “would impact the design or function of our product because we're already covering those regulatory concerns,” she said.
Hessert pointed out that there are a lot of questions around what cryptocurrency regulation would look like and if it would create a path for technology companies to receive bank charters more easily.
“That innovation would be really exciting from a regulatory perspective, where you could have more technology companies with the level of oversight that you would expect from a bank participating," he said. "If the innovation and the activity would only be limited to those firms that are already chartered as banks, that would on the other hand be very disappointing.”
Hessert hopes for “thoughtful regulation” that “fosters innovation and that levels the playing field and creates protections for customers.”
Questions about backstops
One concern bank regulators and members of Congress have is about how stablecoin issuers back up the digital assets.
Sen. Cynthia Lummis, R-Wyo., has said stablecoins must be 100% backed by cash and audited regularly.
Skeptics often question the reserves stablecoin issuers hold and cast a critical eye on Tether. In attestations published earlier this year, Tether executives announced that roughly half of Tether’s reserves are held in commercial paper, the rest is in cash, cash-like products and short-term securities.
U.S.-based stablecoin providers say their digital assets are backed with cash equivalents. Circle and Gemini say all the reserves for USD Coin and Gemini Dollar are held in cash and short-duration U.S. government Treasuries. Paxos says it backs up every Pax Dollar with a dollar in a federally insured U.S. bank account.
Circle, Gemini and Paxos all say their reserves are audited regularly by an independent accounting firm.
Impact of a central bank digital currency
Powell has also said he is considering issuing a central bank digital currency; in other words a stablecoin issued by the government. While this would seem to disintermediate the existing private stablecoin issuers, they don’t seem to be fazed by this, either.
“The fact that the federal government is looking at a central bank digital currency is exciting in that it's a clear validation of the technology and it underscores that this is a real, useful and interesting technology that the private sector has pioneered,” Schaub said. “If governments are seeking to use it as well and to issue their own versions, clearly we're onto something.”
She noted that there’s an enormous addressable market for digital currency.
“There's room for innovation both at the government level and in the private sector, and the ways in which someone might use a central bank digital currency might be different from the ways in which they use a stablecoin that's issued by a private company,” Schaub said.
Allaire also sees plenty of room in the market for public and private stablecoins.
“While it’s still unclear when and if the Federal Reserve will issue a central bank digital currency, we are confident that money and payments on blockchains will grow and drive a massive part of economic activity on the internet, and that private sector and open-source innovation will be core drivers of that transformation,” Allaire said.
Hessert pointed out that as details have not come out, it’s not clear whether a CBDC would compete with or complement private stablecoins.
“Ultimately there's a version of a CBDC that would be incredible for this ecosystem and the adoption of blockchain and digital assets, but the devil's in the details on that,” Hessert said.
Potential roles for banks
Circle, Gemini and Paxos already partner with banks to hold their reserves. Paxos’s are at JPMorgan Chase in New York, Gemini’s are at State Street Bank and Trust in Boston, and Circle’s are at Signature Bank in New York.
Banks could potentially become issuers of stablecoins. In January, an
“We have heard anecdotally that a number of large institutions have started experimenting with blockchain technology ledgers,” Schaub said.
Silvergate Capital in La Jolla, California, which has $12 billion of assets, has
Future of stablecoin
Stablecoin issuers see this form of digital asset becoming more mainstream over time.
“I think we're going to see an enormous growth in stablecoins being used for payments,” Hessert said. “It makes sense when you're dealing with international payments because you have a bunch of institutions that have to coordinate with one another and there's a lot of costs and a lot of delays in international payments.”
But companies like Circle, Gemini and Paxos have ambitions and business models that go far beyond issuing stablecoin. Circle and Gemini in particular say they are building the future of finance.
From the inception of Circle eight years ago, its founders "envisioned a model that was built entirely on the public internet, entirely on blockchain networks and digital currency,” Allaire said. “The idea was if you could take the basic properties of cryptocurrency and connect them to the existing central bank money system, you could get the benefits of digital currency, which is instantaneous, global, ubiquitous, open, interoperable exchange of value and programmable money, and build a new kind of global financial system.”
