FILE - The Treasury Building is viewed in Washington, May 4, 2021. The Biden administration is ... [+]
The world’s governments are grappling with the explosive emergence of stablecoins. Since their introduction in early 2014, global stablecoin holdings have grown rapidly to $123 billion. Stablecoin daily trading volume is equivalent to the world’s 22nd largest sovereign currency. Soon, the U.S. House may vote on the Clarity of Payments Stablecoins Act.
Stablecoins are cryptocurrencies redeemable on demand for fiat currency held in custody by a bank or similar custodian. For example, one unit of the USDC
Many are concerned. Senator Elizabeth Warren has repeatedly questioned the value and utility of stablecoins and called for strong regulation. Just last month, the Federal Reserve warned that stablecoins could be a source of financial instability. And the EU’s rigorous new Markets in Crypto Assets (MiCA) law, set to take effect next year, may lead to the delisting of many stablecoins.
But these fears are misplaced. Stablecoins have enormous benefits for the U.S. financial system by reinforcing U.S. dollar-dominance.
Since the end of World War II, the U.S. dollar has served as the world’s reserve currency. The U.S. represents just 10% of global trade, but more than 40% of trade is invoiced in U.S. dollars and the Bank for International Settlements reports 88% of foreign exchange is through USD. To support this trade in times of financial crisis, every country holds some level of U.S. dollar reserves. These reserves are stored in U.S. Treasury bonds, which gives countries a further vested interest in U.S. stability.
Meanwhile, any country without access to the U.S. dollar-backed system is largely frozen out of global trade. The U.S. has used sanctions against Iran, North Korea, and Russia to hamstring their economic activity. It has sanctioned terrorists and drug lords to disrupt financing networks and China-owned enterprises to prevent the sale of high-tech chips for military purposes.
As a result, dollar dominance may just be the U.S. government’s strongest foreign policy tool. Stablecoins are reinforcing this system in several ways.
First, stablecoins expand access to dollars. Many people around the world, such as the citizens of China, Russia, Iran, and Venezuela, lack access to USD-denominated bank accounts. Despotic governments often subtly tax their people by inflating their national currency while curbing access to dollars through strict capital controls. Stablecoins have the potential to enable 1.4 billion Chinese, for instance, to access dollars. It’s worth noting that Vietnam, Pakistan, Russia and China all rank among the top 10 in terms of crypto adoption. Coingecko data shows 98% US dollar dominance in the stablecoin market - even more than the foreign exchange markets.
Second, contrary to popular belief, crypto helps the U.S. prevent illicit money flows. Blockchain analysis firm Chainalysis finds that less than one percent of blockchain transactions involve criminal activity. And these are mostly scams, rather than money laundering or terrorist financing. Furthermore, a 2021 report co-authored by a CIA former director of intelligence found that “identified cases of money laundering through cryptocurrency remain relatively small compared to the volumes of cash laundered through traditional methods.” Banks maintain their own independent databases, while the blockchain is an interconnected historical ledger of every transaction that makes tracing easy. As authorities learn this technology, they are getting more effective at tracking down illicit activities through crypto than through the traditional banking networks.
To be sure, stablecoins may introduce risks if unregulated. But the U.S. can, and will, regulate stablecoin issuers just as it regulates any other financial institutions. USDC is already regulated by FinCen as a money services business. ZUSD is already regulated by the well-regarded New York Department of Financial Services, as is Paxos (the issuer behind Paypal’s new stablecoin). Responsible regulation ensures that reserves are held safely in custody and law enforcement are able to freeze and seize coins when necessary.
U.S. officials on the federal level are starting to wake up to this reality: a House financial committee advanced the Clarity of Payments Stablecoins Act in July and now it may soon face a vote on the House floor. The bill gives stablecoin issuers considerable leeway in terms of reserves, while protecting consumers and seeking to ensure financial stability.
If this bill were to become law, U.S. officials would keep stablecoin issuers in-house rather than pushing them abroad. They would also help make dollars more accessible to the world, reinforcing dollar dominance and strengthening the American economy.
