The rise and risks of stablecoins
US law bringing the asset into the mainstream has dangers for financial stability
The editorial board
President Donald Trump holds up the signed Genius Act on Friday. The move sets stablecoins on a path to play a big role in the future of money globally © Al Drago/BloombergLast week, in a rarity for a deeply polarised Washington, large bipartisan majorities of Congress passed the Genius Act, creating a legal framework for US dollar-denominated privately issued stablecoins, or blockchain-based tokens of a fixed monetary value.
It brings the US and the world one step closer to the digitisation of national and cross-border payment systems — and to the conflict over who will dominate these systems and the risks they will pose to the real economy.
Like it or not, the regulatory imprimatur of the Genius Act sets stablecoins on a path to play a big role in the future of money globally.
Like the EU’s Mica regulation, the law requires stablecoins to be fully backed by safe reserves such as cash or short-term US Treasury securities.
It imposes some regulatory supervision, financial reporting, and compliance with certain anti-money laundering and sanctions laws.
It only allows foreign companies operating under similar rules to offer stablecoins in the US.
All this goes at least some way towards protecting against the worst abuses.
It will no doubt, as the sponsors of the law intend, accelerate dollar stablecoins’ adoption at home and abroad.
Granting stablecoins a secure space in the regulated financial system puts US issuers in pole position to maintain the greenback’s dominance of cross-border payments.
But the technological transformation about to hit payments is fraught with risk.
If stablecoins succeed, they are likely to eat into the business of banks, while being regulated with nowhere near the same rigour.
The US itself has painful historical experience of what can go wrong.
The mid-19th century era of “free banking”, ushered in by president Andrew Jackson’s successful campaign against a federal proto-central bank, featured chaotic monetary conditions as each bank issued its own currency, which traded at varying exchange rates to one another.
The Bank for International Settlements has warned of history repeating itself with privatised issuance of competing stablecoins.
The Genius Act and similar laws may moderate the risk — but as with banks, central government will ultimately have no choice but to stand behind the stable value of the currency when things go bad.
This is one reason other jurisdictions — notably the EU and China — are developing central bank digital currencies instead, akin to publicly issued stablecoins.
The other is a fear that dollar stablecoins used in international payments may encroach on their own economies.
International financial stability will soon find itself at risk from a brewing battle between private stablecoins favoured by the US — Congress is considering a law that would ban a US CBDC — and the digital euro and renminbi.
Finally, promoted as the most respectable corner of the cryptoasset universe, stablecoins are also a gateway to much riskier activity.
The fact they make it much easier to go in and out of crypto generally is a chief motivation behind the industry’s support.
A third related law going through Congress, the Clarity Act, is intended to clear the path for the broader US crypto industry.
There is an unholy alliance behind the US crypto push — melding strategic interest in growing an industry where the US leads with a desire to attract global money flows, lower government funding costs, and boost a number of get-rich-quick schemes, including by the Trump family itself.
The digitisation of money cannot be avoided.
But we have seen time and again how financial innovation, when left to its own devices, can leave wreckage in its wake.
The US has chosen its course; other countries would do well to weigh other options.
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