In late 2008, an anonymous figure by the alias of Satoshi Nakamoto published the first Bitcoin whitepaper.[i] While it would take some years for this paper, and its subject Bitcoin, to become mainstream, the seeds of a workable digital currency were sown. In Bitcoin, the world finally had a trustless, P2P, digital currency that worked. However, as the years passed by and activity on the Bitcoin blockchain grew, the thesis of Bitcoin fulfilling its intended destiny as a global online currency began to crack. Simply put, Bitcoin could not handle high transaction throughput and it was too volatile to serve as a medium of exchange. In 2014, a superior form of digital currency emerged from the Bitcoin community: the stablecoin, a digital token that is representative of a real-life currency unit. From 2014 up to today, the use of stablecoins has increased exponentially and parties ranging from financial regulators to banks to consumers are beginning to feel the effects of an innovative technology that most have yet to fully understand. While stablecoin technology can be frightening, and does come with a new set of risks, its potential for impact is significant, especially in the case of the global economy and society at large. This brings me to the purpose of this post, which is twofold. Firstly, this post will detail an argument for the utility of stablecoins, their benefits, and how those benefits stand to be greater than the drawbacks. Secondly, this post introduces a discussion around potential regulatory approaches to centrally issued stablecoins and proposes a high-level regulatory framework that addresses stablecoins in a thoughtful and innovation-friendly way.

Introduction

Definition

According to Coinbase, one of the leading financial institutions in the crypto space, a stablecoin is defined as “a digital currency that is pegged to a ‘stable’ reserve asset like the U.S. dollar”.[ii] Stablecoins can be obtained through an exchange (i.e. Coinbase) as well as through a minting process carried out on the issuer’s website (or through a partner’s website). As referenced above, the main motivation behind the creation of stablecoins was to launch a scalable and stable digital currency, avoiding the pitfalls of Bitcoin as it pertains to price volatility and low throughput. Effectively serving as an online dollar, the stablecoin manifests several characteristics of today’s currency, but with improvements in speed, cost, and efficiency driven by its digital nature.

Stablecoin Types

While the stablecoin market started with a single token from Tether, an institution somewhat notorious for its USDT stablecoin, the sector blossomed across the years to include several other stablecoins and new modes of stablecoin operation. Overall, stablecoins can be categorized as one of the following: fiat collateralized, crypto collateralized, and algorithmic.[iii]Starting with fiat collateralized, this is a stablecoin that is tied to a fiat currency (i.e. the U.S. dollar) and has 1:1 redeemability to that fiat unit. It is generally assumed that the reserves for this type of stablecoin are denominated in that same fiat currency. Examples include Tether’s USDT and Circle’s USDC. Then, there are crypto collateralized stablecoins, which are backed by cryptoassets (i.e. Ethereum) as means for reserves and redeemability. The best example is MakerDAO’s DAI, a decentralized stablecoin backed by Ethereum reserves. Lastly, there are algorithmic stablecoins, which have no collateral and rather work through a set of burning and minting mechanisms to keep the stablecoin in line with a target price. Fei Protocol’s FEI and Frax Protocol’s FRAX are two examples of this. Overlaying these three types of stablecoins is the secondary categorization of whether their issuance is centralized or decentralized. Centrally issued stablecoins originate from an entity that has a physical presence (i.e. Circle in the United States). One thing to point out is that centrally issued stablecoins are nearly always fiat collateralized. On the other hand, decentralized stablecoins are subject to governance by a decentralized autonomous organization (“DAO”). These stablecoins do not have a physical entity backing and governing them. Rather, DAOs are composed of contributors and community members from all over the world.

While the stablecoin market is very diverse and newer products like decentralized algorithmic stablecoins are intriguing, this post will focus solely on discussing centrally issued stablecoins (albeit, the post’s second and third sections do also apply to other classes of stablecoins). The reason why the post will exclusively focus on centrally issued stablecoins is because it is currently the most widely adopted category, and thus holds the highest probability of being the mainstream stablecoin of choice. If one compares the outstanding market value of the top three centrally issued stablecoins to the top three decentralized stablecoins, the adoption divergence becomes clear: centrally issued stablecoins total ~$131b and decentralized stablecoins ~$21b, respectively. By breakdown, they would be USDT ($76.59b), USDC ($40.79b), and BUSD ($13.61b) versus DAI ($8.98), UST ($8.19b), and MIM ($3.75b).[iv] With a significant first mover advantage, centrally issued, fiat-collateralized stablecoins have been leading the way as the most adopted stablecoin version, attracting significant regulatory attention, which is another reason for it being the subject of the post’s focus.

Use cases

Today

The use cases today for stablecoins are nearly entirely related to the crypto economy. The first main use case is as a medium of exchange, particularly for the Decentralized Finance (“DeFi”) ecosystem as well as the NFT ecosystem.[v] [vi]Stablecoins like USDC are used to move value from one smart contract to another, used as an intermediate holding asset between two investment operations, and used for asset exchange. The main attraction of stablecoins as a medium of exchange stems from their near zero price volatility. In the crypto economy, where prices are tremendously volatile, stablecoins serve as a great medium of exchange and intermediary store of value. Furthermore, it is not that stablecoins are used just by investors and users in the crypto economy as a medium of exchange, but they are also used in an automated way by DeFi protocols as means of payouts (i.e. in the case of decentralized option markets) and liquidity pools (i.e. in the case of savings protocols).[vii] [viii] A significant share of stablecoin market value is locked (deposited) in DeFi protocols, amounting to a big chunk of the $100b+ DeFi total value locked.[ix]

The second main use case for stablecoins is as a medium of payment. Within the crypto economy, there are an estimated 1.7m DAO members.[x] Several of these members are active and paid contributors, with stablecoins being a key form of payment. In addition to DAOs, several crypto-focused and crypto-native organizations have chosen to pay their employees directly in crypto, again with a popular form of payment being stablecoins.[xi] Adjacent to this is the use of stablecoins within the charity realm. Crypto contributions to charity have skyrocketed the last few years. For example, Fidelity Charitable, the U.S.’s largest grant maker, has received over $274m in crypto contributions YTD.[xii] While most donations are still denominated in Bitcoin and Ethereum, the use of stablecoins for donation is becoming more accepted as well as demanded given that it is much less volatile than the aforementioned cryptoassets.[xiii] Products like Coinbase Commerce enable merchants and charities to accept USDC as a form of payment.

The third main use case today for stablecoins, which is interlinked with the first two yet trails them in usage, is that of remittances. As will be discussed in the next section, the current infrastructure for remittances is clunky, slow, and very expensive; thus, stablecoins present a more efficient means to send money cross-border. Several notable entities are attempting to address and promote this use case. Facebook’s Novi has kicked off a pilot which will allow users to send the Pax Dollar stablecoin from the U.S. to Guatemala, a sizeable remittance corridor.[xiv] Blockchain entity Celo has created a mobile-first blockchain angled towards developing nations to establish a remittance market where fees average around $0.01.[xv] Partners to Celo include, but are not limited to, the World Economic Forum, the United Nations World Food Programme, the World Bank, and the Digital Euro Association. While still nascent, the stablecoin-driven remittance industry is starting to scale.

Tomorrow and Beyond

While the use cases above are valuable and illustrative of stablecoin utility, they represent a drop in the bucket of the future use cases, assuming adoption ensues. Looking to a global payments total addressable market (“TAM”) of $35t and an M2 money supply TAM of $130t, the stablecoin market opportunity is tremendous.[xvi] A plausible future of digitized finance and society could see stablecoins form the most common medium of exchange and choice for payments. Stablecoins would be crucial as an intermediary and currency in financial markets, a main avenue for corporate and retail payment flow, and the backbone of cross-border payments for the purposes of remittances, foreign aid, foreign exchange, and more. It is this potential that has driven some of the world’s most valuable companies (Visa, Mastercard, Facebook) and most powerful governments (U.S., E.U., China) to get up to speed with stablecoin technology.[xvii] [xviii]

Benefits and Drawbacks

While the interest in stablecoins is certainly unarguable, the debate on the benefits and drawbacks pertaining to the technology is still in progress, with some of the top companies, institutions, governments, and individuals in the world contributing their views. While there are plausible risks, which I will concede, to stablecoin adoption, I argue that the benefits far outweigh them and, with the introduction of fair and innovative regulation, the path to stablecoin adoption should become smoother and more viable.

Benefits

The main benefits pertaining to stablecoins can be summarized across the vectors of speed, cost, and inclusivity. First and foremost, stablecoins offer a faster means to move money than the current financial infrastructure. Given their ability to be settled on blockchains, stablecoins can transfer value in under minutes, which blows ACH settlement of ~1–3 days out of the water. According to a 2020 report from the Office of the Comptroller of the Currency (“OCC”), stablecoins based on decentralized technologies can supply faster and more efficient payment mechanisms than the current financial infrastructure, which is well suited to the changing financial needs of the nation.[xix] A report by Deutsche Bank argued that stablecoins, specifically CBDCs, would dramatically increase the efficiency of settlements as it pertains to currency and securities, which currently faces a multi-day lag.[xx] By increasing the speed and reducing the time for transfer and settlement, stablecoins unlock a whole set of economic advantages. At a high level, minimal settlement times will spur greater market efficiency as it enhances the flow of money in the economy: people would receive their salary in minutes (enabling them to spend faster), businesses would receive their revenue in minutes (allowing them to reinvest faster), and governments could engage in more direct monetary policy in order to avoid some of the negative effects of currency drain on the money multiplier.[xxi] The displacement of the check by stablecoins would create immense value for low-income households, which have traditionally been left out of the FinTech wave.[xxii] By just not having to go to gregarious check cashing operators, low-income families would save a significant portion of yearly wealth. Note, that a reasonable counter is that this vision will take time to come together. And, while I agree with that, stablecoins are not a technology that only works at scale — the benefits of speed can be reaped in an incremental fashion as adoption grows.

Secondly, there is the benefit of being a lower cost medium of exchange. Going back to the use case of remittances and cross-border payments, blockchain-based stablecoins enable international transaction at a minimal fraction of current methods. For context, the World Bank estimates that the average cost of global remittances was 6.30% of the amount sent.[xxiii] Additionally, concerning the U.S. alone, it is estimated that the average cost in 2020 to send money out of the country was 5.14%, respectively.[xxiv] According to the World Bank, if remittance prices could be cut by 5 percentage points, the world would save up to $16b per year.[xxv] At the current level, stablecoins can more than do this, with most transactions priced at less than a penny.[xxvi] A potential counter to that is that current digital payment offerings are most likely already doing this, so why add additional risk through stablecoins? Well, sadly, this is not the case at all. Not only have the unit costs of finance not gone down over the past century, but even with the advent of FinTech, a large share of the globe’s population is not benefiting, especially those in the low-income bracket.[xxvii] Low-income households still operate on checks, prepaid debit cards, and debit cards. These forms of personal finance expose them to significant overdraft fees as well as make them disproportionately bear the brunt of credit card costs embedded in prices.[xxviii] Stablecoins and digital wallets would change the check and debit businesses drastically, whether through innovation-propelled efficiency or outright disintermediation, alleviating low-income groups from several fees and economic costs. It is important to note the argument for the stablecoins’ low-cost advantage is not just echoed by groups in the private sphere, but also by government officials and policymakers, who have agreed that the markups and transaction costs of the financial system need to be reduced (i.e. Fed Governor Waller’s speech on CBDCs).[xxix]

Thirdly, there is the benefit of inclusivity, which was partially touched on above. According to the Federal Deposit Insurance Corporation (“FDIC”), 25% of American households are unbanked or underbanked.[xxx] While I do concede Fed Governor Waller’s argument that a subsect of these people has no interest in joining the banking system (estimated by him as ~4% of the population), it does not necessitate that the other ~21% should be ignored.[xxxi] By creating a low barrier form of digital cash that has immediate access to digital financial services, this large group of American society can now be fully included in the financial sector. The economic consequences would be tremendous: more consumers, more capital, more services, etc. On top of this, if one expands this argument to the global economy, the economic effects would be titanic, with the World Bank estimating that a whopping 31% of global adults are unbanked.[xxxii] Combine this with the fact that ~78% of the world’s population has a mobile phone, and it becomes clear that a digital, mobile-based stablecoin could encompass a significantly higher percentage of the global population than the current financial system.[xxxiii] It is important to highlight that this is not a farfetched argument as entities like Celo already have the technology in place to make this a reality. It is the cooperation among governments and financial institutions that is being waited on. One final point to mention is that stablecoin technology could greatly increase the effectiveness of government financial aid and monetary response to lower-income groups. While the COVID-19 Fed-Treasury response was astonishing in many ways, the relative effectiveness compared to a theoretical scenario under stablecoins is poor: Congress passed the COVID-19 relief bill on March 27, yet by May 1, only 64% of the eligible people had been sent their first round of pandemic payments.[xxxiv] In the words of a Brookings Economic Study, eligible lower income households largely suffered because “Uncle Sam did not know how to send money to its citizens”.[xxxv] Thus, stablecoin technology can be accretive to government policy as well.

In addition to these main benefits, there are a couple of other ones to mention. Firstly, according to the OCC, stablecoin technology on decentralized blockchains offers more security and resilience than current financial institutions in some circumstances.[xxxvi] Secondly, the digital nature of stablecoins strongly aligns with the younger generations (Millennials and Gen Z) as these tended to grow up in a more digital-friendly era.[xxxvii]

Drawbacks

In terms of the cons pertaining to stablecoins, there are four main ones. Firstly, and this is the most important one I argue, stablecoins are a new technology, and new technologies entail significant known and unknown risks. The technology behind stablecoins can be hard for financial institutions to adopt, thus leading to increased cybersecurity risk, new fraud vulnerabilities, certification issues, and more.[xxxviii] As financial institutions and businesses plug into stablecoin rails, their insufficient knowledge of blockchain technology, or an unforeseen tech stack risk, makes them susceptible to attack. Additionally, the reliance on underlying blockchain technology could lead to further exposure to risk. For example, if an accepted stablecoin is produced on a blockchain A, which becomes the target of a successful overriding 51% attack, then the ledger becomes compromised and the stablecoin balances and transaction history may be altered.[xxxix] One last thing to mention is that stablecoins are innately connected to the nascent crypto economy. The cryptoasset space faces a confluence of high leverage and significant volatility. When certain loan liquidations coincide with periods of low liquidity, a cascade of falling asset prices and liquidations ensues, threatening to de-peg stablecoins (more on this below).[xl]

AML / CFT compliance presents another big risk for institutions dealing with stablecoins. Regulators as well as financial institutions fear that the current pseudonymous nature of cryptoassets can expose those that interact with stablecoins to money that has been laundered or that is / will be used for terrorist financing. Doing so would be in breach of the AML / CFT standards developed by the Financial Action Task Force (“FAFT”), a G7 intergovernmental agency whose prime purpose is to combat money laundering.[xli] Without being able to regulate stablecoin money flow at certain choke points, government departments such as the Treasury are very concerned. Moreover, it is not an issue that can really be dealt with by one country alone: as long as there is a breach in the system somewhere around the world, then the whole stablecoin network would technically be compromised.

Thirdly, there is the inherent issue with what is called last mile delivery. According to the OECD, stablecoins overall are very promising, especially for the developing world, however the crux of the matter doesn’t lie within their use, but rather within the fiat on-ramps and off-ramps.[xlii] Once USDC has been sent to a user in Western Africa, how easy is it for them to turn it into their local currency, say the Naira? There are no stablecoin ATMs, neither many crypto off-ramps. Even in nations with wide scale use of digital / mobile money, there lacks a network for cashing out stablecoins or cryptoassets in general. The benefits behind stablecoins are potentially challenged by the inability for the stablecoin to work full circle.

Fourth and finally, there is the inherent liquidity risk within stablecoins and the consequences that may bear on the wider financial system. This risk is represented in a couple of different ways. Liquidity risk may arise from the misalignment of the settlement timing and processes between other financial systems and the stablecoins. The President’s Working Group on Financial Markets, in collaboration with the FDIC and OCC, detailed an example whereby the stablecoins would be operating 24/7, but the payment rails for minting / redeeming would only work during regular busines hours. This would lead to periods of temporary shortages and mismatches between supply and demand.[xliii] Liquidity risk also manifests itself in the minting / redeeming processes as well as the maintenance of the peg. In certain market situations, significant redemptions could lead to breaking the $1 peg (as was seen with money market mutual funds in 2008), which would catalyze a whole series of negative consequences as well as sow distrust in stablecoins.[xliv] If this is the case, stablecoins could become reminiscent of 1830s Wildcat banking.

Before moving on, the reader may be surprised not to see the threat to U.S. monetary policy as a drawback for stablecoins. This was not addressed because stablecoins, even private ones, actually strengthen the government’s ability to conduct monetary policy. As Fed Governor Waller stated, “private stablecoins pegged to the dollar broaden the reach of U.S. monetary policy rather than diminish it”.[xlv] Now, whether it is a threat to countries that will lack stablecoins denominated in their own currency is a fair question, but the onus there falls more on those governments than on stablecoin technology itself.

Are stablecoins worth it?

Both the pros and cons bring up several fair points, and it is the soundness of both sides that makes the overall discussion on stablecoins somewhat challenging to conclude. That being said, I argue that the aforementioned benefits are very compelling, and their potential is too significant to ignore. On top of this, I reason that certain risks can be mitigated via sound and innovative regulation. Thus, with this regulatory assistance, the benefits are well worth underwriting the risks left over.

Recapping the benefits of stablecoins as compared to the current financial system, their performance across speed, cost, and inclusiveness, at least as it stands at today’s scale, is significantly better. It is interesting to note that there are several proponents for dealing with the current financial system’s shortcomings in more traditional ways. The Fed is working on FedNow, which aims to provide a real-time payment service[xlvi]; however, this is only scheduled to launch in 2023 and government deadlines tend to be overly optimistic. There are also FinTech solutions, which manifest great progress in the likes of PayPal’s merchant network, Tencent’s WeChat, and Wall Street’s Zelle. Yet, as was argued above, these systems drastically underserve certain echelons of the population and still are slowed down by choke points created by the current financial system (i.e. taking money out of Venmo still takes a matter of days). Some even say that they exacerbate inequality, brining into question the societal costs of FinTech.[xlvii] If there is a solution like stablecoins that does offer a nuanced approach to tackling the problems associated with speed, cost, and inclusivity, why not be supportive of at least giving it a try?

A counterargument to the above emanates from the risks that stablecoins bring. I concede that technology risk, security risk, and issues pertaining to last mile delivery are problems that will have to be faced head on. It would be erroneous to present stablecoins as a unicorn-like solution with no problems. These are risks that involved parties will have to work together to tackle, but the magnitude of the benefits makes this worth it. Through better education and security practices, some of the technology risk can be assuaged: as the space evolves, there will be several consulting and cybersecurity firms filling in to assist, just as there was with the internet. Through funding innovation and building government-private sector partnerships, the last mile delivery problem and other similar constraints can be alleviated. Additionally, these issues should begin to fade with greater stablecoin adoption, which by default provides more avenues for usage.

Will there still be technology risk and unknown unknowns? Could certain problems, like increased network fees, arise as stablecoin systems scale? These are fair questions, and yes, risks and problems like those will be present; however, so was the case with other momentous technologies like the internet. Additionally, it is also not as if financial institutions aren’t exposed to serious technology risks now: cyber breaches, hacks, and system failures have plagued them for years (i.e. Reserve Bank of New Zealand, Equifax, JP Morgan Chase, and more).[xlviii] Therefore, it is not wise to reject stablecoins based on the technology risk alone.

When it comes to the drawbacks as they pertain to AML and liquidity issues, this is where legislators and regulators can play a crucial role. If regulation is designed which balances security with sensibility and cognition of this being a new technology, then these drawbacks can be reasonably addressed. This brings me to the next section, which aims to discuss stablecoins in the eyes of regulatory regimes.

Stablecoin Regulation

Assuming that Congress, the Treasury, and the Fed were to let centrally issued stablecoins continue to scale by bringing them into the regulatory framework, what would this look like? Before answering that, it makes sense to first ask if they can be regulated, or is a completely new legal regime needed? I believe the former is correct, and there are two key pieces of financial legislation that give the government the ability to regulate stablecoins. The first is a clause within the Dodd Frank Wall Street Reform, whereby under Title VIII, the Financial Stability and Oversight Council (“FSOC”) can require the regulation of “payment activity” that it determines “is, or is likely to become, systemically important”.[xlix] It can be argued that the $150b and growing stablecoin market value should characterize stablecoins as systemically important, or at least likely to become so. The second is a surviving provision from the repealed Glass-Steagall Act, Section 21(a)(2), whereby deposits, or deposit-like products, that are marketed as retaining a constant value (i.e. price stability) could be considered regulatable.[l] If this is proved to be the case, then stablecoin issuers would require federal or local supervisory oversight. Given the definition of stablecoins, it can be reasoned that they fit this description.

Going back to the central question of this section, regulating a new technology can be quite complex; however, the underlying principles of stablecoins relate to two types of financial products existing today: deposits and securities, such as of a money market mutual fund (“MMMF”). The relationship to these products can provide some insight into certain regulatory frameworks to learn from. Looking at stablecoins as deposits would most likely make regulation of stablecoin issuers akin to that of commercial banks. To address the potential risks pertaining to stablecoin runs and liquidity risk, legislation could require stablecoin issuers to be insured depository institutions, subjecting them to appropriate supervision by the FDIC.[li] [lii]This would help dissolve the contagious and inherent bank run problem, which could easily plague stablecoins. Regulating them this way would also bring stablecoins into compliance with the Section 21(a)(2) provision, which if not in compliance with can result in criminal punishment. Some members of Congress have taken this path even further, arguing that it is only banks that should be able to issue stablecoins (proposed Stablecoin Classification and Regulation Act of 2020, an amendment to the Federal Deposit Insurance Act).[liii] While this is a clearer and, frankly, easier way to incorporate stablecoins into the regulatory framework, it begs the question of whether this would cause regulatory overburden for stablecoin issuers. It is tough to confidently argue that they should be fully regulated as commercial banks when they are very similar to FinTech companies that largely operate as shadow financial institutions. What would be the effect on the competitiveness of stablecoins and would this taint some of its benefits?

On the other hand, stablecoins could be regulated as securities. MMMFs, funds which take in capital to invest in highly liquid, near-term instruments, tend to report NAV at $1 and seek to maintain that peg. This carries a very similar proposition to stablecoins, and thus some have argued that stablecoin issuers should be regulated like MMMFs. The issue with this, however, is that stablecoins would then be treated as securities, and this carries a higher level of burden than basic currency.[liv] Additionally, a stablecoin violates the principal-interest component of a capital markets investment, which calls into question how it could even be a security.[lv] Finally, how would merchants, businesses, and consumers use stablecoins on an ongoing basis if they were securities? This would drastically reduce the trust and ease of use behind stablecoins.

Regulating stablecoins, I argue, will require coming up with new amalgamation of several provisions already well understood and passed under other legislation. A high-level detailing of a sound approach would look like the following. Firstly, stablecoin issuers could be defined as lite depository institutions, whereby they take in fiat as deposits, which are covered by a new scheme under the jurisdiction of the FDIC. This would alleviate general issues pertaining to liquidity risk, trust, and some systemic risk. Secondly, stablecoin issuers would be given certain leeway to invest a portion of deposits in highly liquid, near-term instruments like MMMFs do, without receiving the same securities classification. This would allow them to fairly earn interest to cover operational costs and potentially make a profit. It must be stated, however, that capital buffers should be required as to cushion any issues that may occur within the markets the stablecoin issuer invests in. These capital buffers could be determined similarly to the Basel II method of calculation for capital requirements. Although MMMFs have broken the buck before, the FDIC component should guard against this as well as the following. Thirdly, stablecoin issuers should be eligible for a master account at the Fed, which would allow them to park reserves there safely and earn some interest.[lvi] Stablecoin issuers should also be able to access some type of discount loan window during times of immense financial stress. Having the Fed as a lender during emergency times should compound the benefits of being FDIC insured as it pertains to liquidity risk. Fourthly, the Treasury and Department of Justice should take a measured approach to AML / CFT compliance. Full AML / CFT compliance cannot be paired with the current state of blockchain-based stablecoins and forcing that matter risks reducing some of their benefits, especially as it pertains to the lower-income bracket. For example, having identity data on every stablecoin wallet (assuming it is even possible) significantly raises the costs of operation and leads to issuance policies that will most likely block unbanked users as that is easier than dealing with them from a compliance perspective. Looking into a blockchain-based system of red flag raising and tracking (i.e. contracting firms like Chainalysis), blended with KYC checkpoints for transactions above a certain nominal value, is an advised path to take and would bring stablecoins somewhat in line with the general principles of FAFT guidance. Just as every transaction on the internet is not fully regulated, not every stablecoin transaction needs oversight. Finally, the Consumer Financial Protection Bureau should be consulted on the disclosure of information to customers, standards of data protection, and rights of recourse.[lvii]

The proposals detailed above shouldn’t be taken as rigid solutions. Rather, they serve as discussion points and key principles off which to construct a comprehensive regulatory package. With these principles as focal points, I am confident that regulation would be able to mostly mitigate the two key risks mentioned above. By doing this, those cons can be assuaged with the benefits side not being too affected, thus strengthening the argument for stablecoins.

Concluding Remarks

Stablecoins have the potential to reshape the financial system, engineering better standards for speed, cost, and inclusiveness; however, they also introduce some noteworthy risks. That being said, just because there are risks present, it doesn’t mean stablecoins should be feared and outright banned. America’s success was defined by the risks it took, and, in most cases, it took those risks in a thoughtful way. With prudent regulation, as suggested above, that focuses on shoring up stablecoin issuers against liquidity risks and AML / CFT compliance risks, in addition to innovation attempting to solve some technological issues and the last mile delivery problem, stablecoins have a serious shot at fulfilling their grand potential. Regulation may as well be the lynchpin to this success, however, and that is why regulators must approach stablecoins in a thoughtful, innovation-friendly, and forward-looking way.

Sources

[i] Nakamoto, Satoshi. “Bitcoin: A Peer-to-Peer Electronic Cash System,” October 31, 2008. https://bitcoin.org/bitcoin.pdf.

[ii] “What Is a Stablecoin?” Coinbase. Accessed December 12, 2021. https://www.coinbase.com/learn/crypto-basics/what-is-a-stablecoin.

[iii] Gogel, David, Sumedha Deshmukh, André Geest, Daniel Resas, Christian Sillaber, and Kevin Werbach. Rep. DeFi Beyond the Hype: The Emerging World of Decentralized Finance. Philadelphia, PA: Wharton Blockchain and Digital Asset Project & World Economic Forum, 2021.

[iv] “Cryptocurrency Prices, Charts, and Market Cap.” CoinGecko. Accessed December 12, 2021. https://www.coingecko.com/en.

[v] Gogel, David, Sumedha Deshmukh, André Geest, Daniel Resas, Christian Sillaber, and Kevin Werbach. Rep. DeFi Beyond the Hype: The Emerging World of Decentralized Finance. Philadelphia, PA: Wharton Blockchain and Digital Asset Project & World Economic Forum, 2021.

[vi] President’s Working Group on Financial Markets, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. Report on Stablecoins (pp. 8–9). Washington D.C. 2021.

[vii] “DeFi & USDC: A Guide to Global Stablecoins and Decentralized Finance.” Circle. Accessed December 12, 2021. https://www.circle.com/en/digital-dollar-stablecoin-solutions-for-defi.

[viii] President’s Working Group on Financial Markets, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. Report on Stablecoins (pp. 8–9). Washington D.C. 2021.

[ix] “Total Value Locked (USD) in DeFi.” DeFi Pulse — The Decentralized Finance Leaderboard. Accessed December 12, 2021. https://defipulse.com/.

[x] “DAO Ecosystem Overview.” Deep DAO — Insights for a Decentralized World. Accessed December 12, 2021. https://deepdao.io/#/deepdao/dashboard.

[xi] Chester, Jonathan. “How USDC Is Enabling International Payments with Bitwage.” Circle, October 1, 2021. https://www.circle.com/blog/how-the-usdc-stablecoin-is-enabling-businesses-to-get-paid-better-with-bitwage.

[xii] Hadero, Haleluya. “Charities See More Crypto Donations. Who Is Benefiting?” Los Angeles Times, November 20, 2021. https://www.latimes.com/business/story/2021-11-20/charities-see-more-crypto-donations-who-is-benefiting.

[xiii] “How to Donate Crypto.” Coinbase. Accessed December 12, 2021. https://www.coinbase.com/learn/crypto-basics/how-to-donate-crypto.

[xiv] Webber, Daniel. “Facebook’s Novi Poses Fresh Challenges for Remittances.” Forbes. Forbes Magazine, October 29, 2021. https://www.forbes.com/sites/danielwebber/2021/10/28/facebooks-novi-poses-fresh-challenges-for-remittances/?sh=1e7fb9a578f0.

[xv] “Celo: Crypto Made for Mobile.” Celo Alliance. Accessed December 12, 2021. https://celo.org.

[xvi] “DeFi & USDC: A Guide to Global Stablecoins and Decentralized Finance.” Circle. Accessed December 12, 2021. https://www.circle.com/en/digital-dollar-stablecoin-solutions-for-defi.

[xvii] “Digital Currency Comes to Visa’s Settlement Platform.” Visa, March 29, 2021. https://usa.visa.com/visa-everywhere/blog/bdp/2021/03/26/digital-currency-comes-1616782388876.html.

[xviii] Gkritsi, Eliza. “Shanghai to Test Offshore Yuan Stablecoin on the Conflux Blockchain.” CoinDesk, September 17, 2021. https://www.coindesk.com/business/2021/09/17/shanghai-to-pilot-offshore-use-of-digital-yuan-on-conflux-blockchain/.

[xix] Office of the Comptroller of the Currency. Interpretive Letter 1174. OCC Chief Counsel’s Interpretation on National Bank and Federal Savings Association Authority to Use Independent Node Verification Networks and Stablecoins for Payment Activities (pp. 3). Washington D.C. 2021.

[xx] Deutsche Bank Data Innovation Group. “The Future of Payments Part III. Digital Currencies: The Ultimate Hard Power Tool.” Deutsche Bank, January 2020 (pp. 11). https://www.dbresearch.com/PROD/RPS_EN-PROD/PROD0000000000504508/The_Future_of_Payments_-_Part_II__Moving_to_Digita.pdf?undefined&realload=lqrOA51wXo2dq2pIEUVF7Fe2PNRlMllf5miWouvSJfZGkr2X0Io3YHzxQ6GP\~DThNttVtYSeuHy8/qSn0E1Jpg.

[xxi] Deutsche Bank Data Innovation Group. “The Future of Payments Part III. Digital Currencies: The Ultimate Hard Power Tool.” Deutsche Bank, January 2020 (pp. 10–12). https://www.dbresearch.com/PROD/RPS_EN-PROD/PROD0000000000504508/The_Future_of_Payments_-_Part_II__Moving_to_Digita.pdf?undefined&realload=lqrOA51wXo2dq2pIEUVF7Fe2PNRlMllf5miWouvSJfZGkr2X0Io3YHzxQ6GP\~DThNttVtYSeuHy8/qSn0E1Jpg.

[xxii] Klein, Aaron. “Can Fintech Improve Health?” Brookings Institution, September 2021. https://www.brookings.edu/wp-content/uploads/2021/09/20210922_Klein_Can_fintech_improve_health.pdf.

[xxiii] “Remittance Prices Worldwide Quarterly.” The World Bank, June 2021. http://remittanceprices.worldbank.org/sites/default/files/RPW_Report_Mar2014.pdf.

[xxiv] “Average Cost of Sending Remittances from the U.S. 2020.” Statista, May 17, 2021. https://www.statista.com/statistics/962747/average-cost-of-sending-remittances-from-usa/.

[xxv] “Remittance Prices Worldwide.” The World Bank. Accessed December 13, 2021. https://remittanceprices.worldbank.org/en.

[xxvi] Sudaric, Slobodan. “Save Money, Transact Faster: Stablecoins as an Alternative to Traditional Banking.” Nasdaq, September 7, 2021. https://www.nasdaq.com/articles/save-money-transact-faster%3A-stablecoins-as-an-alternative-to-traditional-banking-2021-09.

[xxvii] Financial institution unit economics over time, Georgetown Lecture

[xxviii] Massad, Timothy G. “Regulating stablecoins isn’t just about avoiding systemic risk.” Brookings Institution, October 5, 2021. https://www.brookings.edu/research/regulating-stablecoins-isnt-just-about-avoiding-systemic-risk/.

[xxix] Waller, Christopher J. “Reflections on Stablecoins and Payments Innovations.” Board of Governors of the Federal Reserve System. Federal Reserve, November 17, 2021. https://www.federalreserve.gov/newsevents/speech/waller20211117a.htm.

[xxx] Massad, Timothy G. “Regulating stablecoins isn’t just about avoiding systemic risk.” Brookings Institution, October 5, 2021. https://www.brookings.edu/research/regulating-stablecoins-isnt-just-about-avoiding-systemic-risk/.

[xxxi] Waller, Christopher J. “Reflections on Stablecoins and Payments Innovations.” Board of Governors of the Federal Reserve System. Federal Reserve, November 17, 2021. https://www.federalreserve.gov/newsevents/speech/waller20211117a.htm.

[xxxii] “2. The Unbanked.” The World Bank. Accessed December 13, 2021. https://globalfindex.worldbank.org/sites/globalfindex/files/chapters/2017 Findex full report_chapter2.pdf.

[xxxiii] “Smartphone Penetration Worldwide.” Statista, June 2, 2021. https://www.statista.com/statistics/203734/global-smartphone-penetration-per-capita-since-2005/.

[xxxiv] Klein, Aaron. “Can Fintech Improve Health?” Brookings Institution, September 2021 (pp. 24). https://www.brookings.edu/wp-content/uploads/2021/09/20210922_Klein_Can_fintech_improve_health.pdf.

[xxxv] Klein, Aaron. “Can Fintech Improve Health?” Brookings Institution, September 2021 (pp. 24). https://www.brookings.edu/wp-content/uploads/2021/09/20210922_Klein_Can_fintech_improve_health.pdf.

[xxxvi] Office of the Comptroller of the Currency. Interpretive Letter 1174. OCC Chief Counsel’s Interpretation on National Bank and Federal Savings Association Authority to Use Independent Node Verification Networks and Stablecoins for Payment Activities (pp. 8). Washington D.C. 2021.

[xxxvii] Deutsche Bank Data Innovation Group. “The Future of Payments Part III. Digital Currencies: The Ultimate Hard Power Tool.” Deutsche Bank, January 2020 (pp. 7). https://www.dbresearch.com/PROD/RPS_EN-PROD/PROD0000000000504508/The_Future_of_Payments_-_Part_II__Moving_to_Digita.pdf?undefined&realload=lqrOA51wXo2dq2pIEUVF7Fe2PNRlMllf5miWouvSJfZGkr2X0Io3YHzxQ6GP\~DThNttVtYSeuHy8/qSn0E1Jpg.

[xxxviii] Office of the Comptroller of the Currency. Interpretive Letter 1174. OCC Chief Counsel’s Interpretation on National Bank and Federal Savings Association Authority to Use Independent Node Verification Networks and Stablecoins for Payment Activities (pp. 9). Washington D.C. 2021.

[xxxix] President’s Working Group on Financial Markets, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. Report on Stablecoins (pp. 13). Washington D.C. 2021.

[xl] Klages-Mundt, Ariah, and Andreea Minca. “(In)Stability for the Blockchain: Deleveraging Spirals and Stablecoin Attacks.” Cornell University, March 2, 2021. https://arxiv.org/pdf/1906.02152.pdf.

[xli] President’s Working Group on Financial Markets, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. Report on Stablecoins (pp. 19). Washington D.C. 2021.

[xlii] Rühmann, F., et al., “Can blockchain technology reduce the cost of remittances?” OECD Development Co-operation Working Papers, №73 (2020): 23. https://doi.org/10.1787/d4d6ac8f-en.23

[xliii] President’s Working Group on Financial Markets, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. Report on Stablecoins (pp. 13). Washington D.C. 2021.

[xliv] Massad, Timothy G. “Regulating stablecoins isn’t just about avoiding systemic risk.” Brookings Institution, October 5, 2021. https://www.brookings.edu/research/regulating-stablecoins-isnt-just-about-avoiding-systemic-risk/.

[xlv] Waller, Christopher J. “Reflections on Stablecoins and Payments Innovations.” Board of Governors of the Federal Reserve System. Federal Reserve, November 17, 2021. https://www.federalreserve.gov/newsevents/speech/waller20211117a.htm.

[xlvi] Waller, Christopher J. “Reflections on Stablecoins and Payments Innovations.” Board of Governors of the Federal Reserve System. Federal Reserve, November 17, 2021. https://www.federalreserve.gov/newsevents/speech/waller20211117a.htm.

[xlvii] Klein, Aaron. “Can Fintech Improve Health?” Brookings Institution, September 2021. https://www.brookings.edu/wp-content/uploads/2021/09/20210922_Klein_Can_fintech_improve_health.pdf.

[xlviii] “Timeline of Cyber Incidents Involving Financial Institutions.” Carnegie Endowment for International Peace. Accessed December 13, 2021. https://carnegieendowment.org/specialprojects/protectingfinancialstability/timeline.

[xlix] “Title VIII of the Dodd-Frank Act.” Board of governors of the Federal Reserve System. Accessed December 12, 2021. https://www.federalreserve.gov/paymentsystems/title-viii-dfa.htm.

[l] Jackson, Howell, and Morgan Ricks. “Locating Stablecoins within the Regulatory Perimeter.” The Harvard Law School Forum on Corporate Governance, August 5, 2021. https://corpgov.law.harvard.edu/2021/08/05/locating-stablecoins-within-the-regulatory-perimeter/.

[li] President’s Working Group on Financial Markets, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. Report on Stablecoins (pp. 2). Washington D.C. 2021.

[lii] Catalini, Christian, and Jai Massari. “Stablecoins and the Future of Money.” Harvard Business Review, August 10, 2021. https://hbr.org/2021/08/stablecoins-and-the-future-of-money.

[liii] Stablecoin Classification and Regulation Act of 2020. Bill (2020).

[liv] Michel, Norbert, and Jennifer J Schulp. “A Simple Proposal for Regulating Stablecoins.” Cato Institute, November 5, 2021. https://www.cato.org/briefing-paper/simple-proposal-regulating-stablecoins#biden-administrations-proposals.

[lv] Michel, Norbert, and Jennifer J Schulp. “A Simple Proposal for Regulating Stablecoins.” Cato Institute, November 5, 2021. https://www.cato.org/briefing-paper/simple-proposal-regulating-stablecoins#biden-administrations-proposals.

[lvi] Massad, Timothy G. “Regulating stablecoins isn’t just about avoiding systemic risk.” Brookings Institution, October 5, 2021. https://www.brookings.edu/research/regulating-stablecoins-isnt-just-about-avoiding-systemic-risk/.

[lvii] Massad, Timothy G. “Regulating stablecoins isn’t just about avoiding systemic risk.” Brookings Institution, October 5, 2021. https://www.brookings.edu/research/regulating-stablecoins-isnt-just-about-avoiding-systemic-risk/.