Crypto Corner: When Stable Coins Implode

What’s one key thing that scares people away from cryptocurrencies? The uncertainty… the inherent volatility in the space, and that makes sense. Stablecoins are a possible answer to that problem. In a nutshell, a stablecoin is a type of cryptocurrency which has its value pegged to another asset class, such as a fiat or gold… this is how the price is “stabilized”. Stablecoins combat volatility in the crypto space by tying the value of coins to these more stable assets… but how does this work?

Here’s how: the issuing entity sets up a “reserve” to securely store the asset, or basket of assets, that will back the stablecoin. In last week’s issue, we learned all about the USDC which is pegged to the US dollar, so we learned a bit about this method… in the case of USDC, the issuers hold fiat in a separate account so that one coin equals a real dollar that is held in reserves. So, the money in reserves serves as collateral for the stablecoin, when a holder of the stablecoin goes to cash out their tokens, an equal amount of the backing asset is taken from the reserve.

However, this is only one setup available for stablecoins. Another type of stablecoin is one that is collateralized by other cryptocurrencies instead of fiat, but still engineered to track mainstream assets like dollars. Yet another is an algorithmic stablecoin… to keep these types of coins stable, coins are burned (rendered unreachable and unusable) or created to keep the value in line with the target price.

Stablecoins are an important staple of the crypto space. They are free of the volatility of non-pegged cryptos, they are open to use by anyone around the world, fast, cheap, secure, digitally native to the internet, programmable… there’s so much utility possible, so many use cases… like minimizing volatility, trading and saving assets, earning interest, transferring money on the cheap, and sending money internationally.

The Government Vision

Stablecoins could potentially play a huge role in the future of digital money. Biden has pushed legislators to pass laws and regulations pertaining to stablecoins with several asks. One of those asks is that lawmakers pass legislation that would treat stablecoin issuers like banks, although… quite a few on both sides of the isle think that approach is far too heavy-handed.

Debates are hot and heavy around this issue, as both Republicans and Democrats realize the need for laws around stablecoins, but what laws… and do current, legacy lawmakers understand the technology enough to make suitable laws at this time, or will those laws turn out to be totally inappropriate for the space? After all, this is a new frontier.

Either way, with the stablecoin market sitting at about $170 billion, lawmakers know they must figure this out and work together to make legislation. Senator Pat Toomey, a Republican lawmaker from Pennsylvania, and the top Republican on the Senate Banking Committee, recently released a draft bill on the issue, stating that stablecoins are a logical place to start with regulations… could this be because of the possible role that stablecoins may play with upcoming CBDCs?

The CBDC Effect

No, seriously… why all the hubbub over stablecoins? Because stablecoins and CBDCs will “grow up” together, in essence, and the Office of the Comptroller of the Currency has made no secret of the fact that the ideal situation would be stablecoin interoperability with a U.S. CBDC… so an environment where, in the future, there is a Central Bank Digital Currency in the United States, and stablecoins work right alongside that CBDC.

Fed Vice Chairwoman Lael Brainard has stated that a digital dollar could coexist with stablecoins, telling House lawmakers that a U.S. CBDC could provide safety to consumers. She fully believes that there could come a day where stablecoins and a CBDC coexist… when addressing lawmakers recently, she stated, “In some future circumstances, CBDC could coexist with and be complementary to stablecoins and commercial bank money by providing a safe central bank liability in the digital financial ecosystem, much like cash currently coexists with commercial bank money.”

There’s speculation among some in the crypto space that the government will push for stablecoins to be issued by federally regulated banks… or that they could be regulated as securities, which would ensure they are overseen by the SEC. Other countries are sharing similar sentiments within their own economic environments… looking into further regulation as the space matures. Does this mean that governments are ready to accept that stablecoins could become as important as banks, that they should be treated as such in case they fail moving forward?

It’s a provocative thought experiment… are we prepared to live in a world where institutions that are cornerstones in the crypto space are treated like banks, possibly even bailed out for being “too big to fail”? While it’s anybody’s guess at this point, watching the space evolve is going to be better than the Super Bowl, and we’ll be here to cover it all… so keep coming back.