Why Stablecoins?
Congress should empower Americans to truly control their digital assets.
The rise of crypto-currency could transform the economy, streamlining transactions and empowering individuals. But Congress so far has failed to pass legislation that would allow people to truly control their own digital assets. The relevant issue is called “self-custody,” and the kind of legislation I would support pertains to a form of crypto-currency called “stablecoins.” I’ll address the former concept below, but first, let’s get clear on crypto and stablecoins.
Most people associate crypto with Bitcoin because it accounts for roughly 58 percent of the market. As of this writing, all stablecoins combined make up only about 7 percent of total crypto market capitalization ($230 billion of $3.3 trillion).
Nevertheless, stablecoins hold enormous promise because, like Bitcoin, they facilitate truly digital transactions without a central bank. However, unlike Bitcoin, stablecoins are fully backed by other assets. Traditional stablecoins also strengthen the U.S. dollar as the global reserve currency while increasing demand for U.S. Treasuries used to fund our enormous $36 trillion debt.
The Basics
First, you need to understand a few basics. Tokens serve as a store of value. Unlike tokens at an arcade or casino, these ones aren’t physical. Rather, they are secure digital addresses with encrypted ownership data that can be digitally signed and transferred to facilitate payments. This feature allows money to move at the speed of light while maintaining most of the characteristics of cash. A blockchain is a digital ledger that securely records all transactions. Each token ends up moving on its own blockchain. Clearly, Bitcoin is the largest, most trusted blockchain. Still, viable alternatives have developed with meaningful differences in how they work, but that’s more in-depth than necessary for an introduction.
What is a stablecoin?
Traditional stablecoins are tokens valued at $1 and backed by $1 worth of cash or U.S. Treasuries. An example is Gemini U.S. Dollar (GUSD) – the first stablecoin approved by the New York Department of Financial Services (NYDFS) – the first government regulator to establish a regulatory regime. Gemini backs every single GUSD in circulation with cash or cash equivalents held across bank accounts, money market funds, and US treasury bills. At any time, Gemini customers can always redeem 1 GUSD for $1.
Commodity Backed Stable Coins (CBSC) also exist and are protected by laws recognizing them as payment stablecoins. They are backed 1:1 with physical custody of the commodity, so they are priced based on the real-time market price for the commodity.
For example, Paxos Gold (PAXG) is an asset-backed token where one token represents one fine troy ounce of gold, stored in secure vaults and audited by NYDFS. Anyone who owns PAXG has ownership rights to that gold. Since PAXG represents physical gold, its value is tied directly to the real-time market value of that physical gold.
Why would anyone prefer a stablecoin to traditional bank deposits?
First, banks have fractional reserves. As anyone who has watched It’s a Wonderful Life knows, when you deposit your money at a bank, they make loans with the money. Of course, they keep cash on hand so they can meet normal demand for withdrawals. But, when a surge in demand for cash or withdrawals occurs, banks can be overwhelmed. Although the risk of a bank default is normally small, bank runs can still produce liquidity crises in the modern world, as customers of Silicon Valley Bank learned in 2023.
Stablecoins are fully reserved with audited balances of 1:1 or higher, so they are required to immediately redeem the token for the cash upon demand. This provides safety and liquidity.
Moreover, a claim to a stablecoin “token” can be reassigned digitally—meaning payments can move at the speed of light. In the most common situation, this is account-based, much like a bank: One person transfers their claim on the deposit to another.
Stablecoins become truly compelling when coupled with “self-custody”. This really refers to owning your own stuff, like the cash in your wallet. While avoiding banks and keeping all one’s money as physical cash isn’t illegal, it’s not easy, and no one wants to carry around bags of dollar bills. Even mail is pretty outdated when we can bank online or use apps like PayPal, Venmo, or Zelle. So, most people use a third-party “custodian” of their cash – a bank or credit union. The third parties provide a valuable service, for a fee. When you pay someone in cash, no third-party intermediary tracks your payment, holds it for review or approval, or reports your payment details to others. By contrast, using a regulated custodian involves surveillance and lags.
Self-custody of stablecoins enables instantaneous, permission-less payments: no friction, no time lag, and very low cost.
What is Congress doing?
Tokenized payments on blockchain have clear advantages. Nevertheless, if these assets remain account-based, their utility is more limited than when held in self-custody. Congress should pass stablecoin legislation to create legal clarity for the market to protect consumers, prevent regulators from selectively shaping or killing the market, facilitate secure and efficient markets, and protect self-custody. Companies, consumers, and individual sellers want to engage in real-time settlement, including cross-border payments. Self-custody is the only way to make that happen. Everything else simply swaps one intermediary for another. Congress must protect self-custody.
So far, banks, bank regulators, and traditional payment processors have lobbied aggressively to either block, stall, or undermine legal clarity for stablecoins. Congress should do the right thing: pass legal clarity for a time-tested, state-regulated regime, and protect self-custody. Otherwise, the federal government will simply wreck another functional industry to protect the incumbents, harm investors, and hinder the public interest in a vibrant market.
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