And you thought stablecoins were all about ‘set it and forget it.’ Some—including the government—think otherwise.
It is one of the ironies of the payments business these days that there seems to be little that’s stable about the news surrounding stablecoins. For a concept that came on the scene a scant seven years ago to answer complaints about the wild volatility of Bitcoin, stablecoins have grown to a collective market cap of more than $140 billion as of mid-November, according to Coinmarketcap.com.
Yet rising concerns about the potential for runs, money laundering, and terrorism financing led government officials last month to recommend Congress regulate this relatively new species of cryptocurrency.
Some observers aren’t surprised. “Stablecoins promise something they’re basically not delivering,” says James Royal, senior wealth reporter at Bankrate.com. “They promise they’re backed by cash, and they’re not.”
Still, if any cryptocurrency concept seems ripe to function as a means of exchange, it would be stablecoins. This is blockchain currency, like Bitcoin, but unlike Bitcoin its value is tied to that of a national currency, in nearly all cases, the U.S. dollar. There may be small fluctuations, but over time the price of a single stablecoin, like Tether or USDC, is supposed to zero in on $1.
These tokens have grown fast over the past year, rising from a total market cap last fall around $25 billion. And new entrants could supercharge that growth further. One such candidate is the Diem stablecoin, formerly known as Libra, which has yet to launch. Its backer, Facebook Inc., has already introduced a Diem digital wallet, known as Novi.
A Perfect Bridge
That vaunted price stability has attracted major payments entities that otherwise have looked askance at the dizzying runups and scary pratfalls of other cryptocurrencies. Mastercard Inc. in July said it will work with a pair of issuing banks and several service providers to test converting crypto coins to stablecoins for direct acceptance of crypto-backed cards on its network.
Mastercard’s announcement followed a similar move by Visa Inc., which late in March said its integration with San Francisco-based Anchorage Hold LLC, the first federally chartered digital-asset bank, allowed the network to process its first transaction involving direct settlement with a stablecoin, in this case, USD Coin (USDC).
“As a payments guy, I think crypto is coming on a transaction network, and stablecoins are a very important [push] behind that,” says Cliff Gray, who follows cryptocurrency as a senior associate at The Strawhecker Group, an Omaha, Neb.-based payments consultancy.
And right now, stablecoins are coming on fast. At BitPay Inc., a platform that supports crypto transactions, the USDC stablecoin accounted for 15.1% of volume in October, up from 1% a year earlier, says Bill Zielke, chief marketing officer. Much of this activity, he adds, stems from cross-border payments, where senders are looking to avoid the costs of conventional channels. “Wire transfers can be expensive and cumbersome” by comparison, he adds.
Indeed, a digital transfer at the blink of an eye and at low cost explains much of the increasing appeal of stablecoins. “We provide that perfect bridge, a seamless transition from legacy systems to fast, cheap systems,” says Rachel Mayer, vice president of product at Circle Internet Financial Inc., the developer of USDC, at $34.4 billion the second-largest stablecoin by market cap, behind only Tether.
‘A Lot to Unpack’
But some of that momentum could be sapped by a federal government that isn’t so sure this branch of cryptocurrency is such a good idea. The root cause of this skepticism lies in the backing for these digital dollars.
Stablecoin developers are supposed to keep reserves in hard currency equal to the value of the coins they have minted. In at least some cases, however, they have been found to have used some cash along with commercial paper, short-term corporate debt, or other such non-cash assets.
Such investments can generate income for the stablecoin sponsor, which makes them more attractive than cash, but that kind of backing could prove problematic, to say the least, were there a run on any of these coins. “At a time of stress, those assets could be marked down, making the coins worth less than a dollar,” says Bankrate.com’s Royal. “It’s a problem generally for stablecoins.”
By contrast, non-stablecoin blockchain currencies, like Bitcoin, may have volatility problems but are generally not seen as run risks. “Bitcoin doesn’t have to have backing because it derives its value from its utility as the most widely accepted [cryptocurrency] coin,” notes Aaron McPherson, an independent fintech and payments consultant.
Fears of a general rout in stablecoins—and a resulting general markdown in value—grow steadily along with the coins’ market caps. In response, the President’s Working Group on Financial Markets, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency early last month issued sweeping recommendations to address what they called “significant and growing risks.”
These boiled down to a suggested trio of new regulations. The first one, which would mandate that issuers be insured depository institutions, captured the most notice, But the other two could be equally consequential: that custodial-wallet providers be subject to federal oversight and that issuers be subjected to limits on affiliations with commercial enterprises.
For their part, issuers are publicly promising cooperation with any new regulations, whatever their private opinions may be. “There’s a lot to unpack, and we’re hard at work working with the federal agencies,” says Circle’s Mayer.
But not all observers agree there’s a problem, let alone a need for new government fixes. “One has to worry the regulatory regime will stifle private-sector innovation in stablecoins,” notes Eric Grover, principal at Intrepid Ventures, a Minden, Nev.-based payments consultancy.
Grover backs disclosure requirements for stablecoin sponsors but suspects some regulators may be angling for stricter rules to hobble private-sector initiatives and protect a future central bank digital currency (CBDC) tied to the dollar and likely controlled by the Federal Reserve.
Such government-backed digital currencies have been topics of discussion in a number of countries. “I worry about that,” says Grover. “This notion that the Fed is benign and fintechs are risky. That concern is wrong, but it’s clear that it’s out there.”
For now, sponsors are chiefly interested in developing use cases that can maximize stablecoins’ inherent advantages—a primary one having to do with enabling low-cost transfers in markets like remittances. Circle has formed ties to both Visa and Mastercard for settlement of payments in USDC at rock-bottom cost, Mayer says. “To settle $1 million in USDC transactions, it’s orders of magnitude less than a traditional transfer,” she notes.
The same holds for such fast-growing markets as gig-economy payouts, “where, with the economics of sending $30 to Nigeria, there’s no comparison [with stablecoins],” Mayer adds. “It’s orders of magnitude cheaper” than a card network.
It may be hard to beat costs like that, but stablecoins may first have to find some stable ground with the Feds and other skeptics before they can profitably press that advantage.