Stablecoins Are Not Worth the Risk

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For the crypto wealthy, hope springs eternal but the rest of us should be very skeptical. Even after the collapse of many crypto companies erased the industry’s credibility along with a lot of fake and real money, the Republican House of Representatives majority wants to dole out favors for stablecoin issuers, the supposedly durable crypto asset.

Mark Hays is senior policy analyst at Americans for Financial Reform, a Washington, D.C.-based economic rights coalition.

Stablecoins have provided little that’s new or useful, are not stable – some had shorter life spans than Sam Bankman-Fried’s FTX – and have cost everyday people dearly. Any legislation addressing them should fully embrace existing policies meant to protect consumers. Or the U.S. Congress could simply support regulators – with additional resources, if needed – to do their job, using time-tested methods.

Stablecoins are cryptocurrencies whose price is pegged to a reference point, often the U.S. dollar, and are collateralized, often in opaque ways. Sometimes it’s a dollar or low-risk liquid assets like U.S. government bonds, other crypto assets or even a computer algorithm designed to maintain a coin’s value. Stablecoins aim to mitigate crypto’s infamous volatility and smooth trading.

In theory, stablecoins could be used widely for ordinary payments. But no stablecoins show signs of functioning at scale. High fees, slow processing speeds and other barriers make them expensive and inconvenient. Nor are they very stable. By some estimates, at least two dozen stablecoins have failed since their introduction – some quietly, and others loudly like Terra, whose disintegration may have contributed to the demise of FTX.

Regulators have repeatedly fined tether (USDT), the largest stablecoin by market share, for misleading consumers about the quality of their reserve assets, and the firm has yet to provide a full audit of its reserves. Tether, which issues USDT, also has deep ties to both the disgraced FTX and crypto giant Binance. Circle, the USDC stablecoin firm that poses as crypto’s white knight, keeps saying it will seek a bank charter to bolster its credibility but never seems to follow through. Perhaps the investigation of Circle by the Securities and Exchange Commission is complicating that plan? Paxos, another stablecoin issuer that aspires to respectability, is now facing a probe by New York authorities.

Stablecoins are the speculator’s “poker chips” used for the crypto casino, in the words of SEC Chair Gary Gensler. So, stablecoins look very much like Wall Street, contrary to the crypto mythologizing about a new kind of finance. When a stablecoin gets shaky, it comes unpegged and spurs a rush to redeem the coins before its value declines to nothing. It has happened already, and crypto speculators are angling for a repeat; they have built up a massive short position against Tether, betting on its failure.

Regulators already have tools to deal with stablecoins. If stablecoins function as bank deposits, then their issuers should apply for bank charters, have deposit insurance, follow prudential standards, and be subject to supervision. Or regulators could keep these assets away from banking and payments entirely and oversee them as speculative instruments they are now by requiring registration, transparency about reserves and other measures that securities issuers already follow. The Department of Justice could also crank up enforcement of Glass-Steagall Act provisions that prohibit deposit-like instruments unless fully regulated under a banking supervision approach or a securities regulatory regime.

Congress could play a constructive role here without legislation. Continued regulatory action that would force stablecoin issuers to declare their digital creations for what they are, not what they wish them to be. Happily, the White House appears to sympathize with this view; in a blog last month, it expressed skepticism toward stablecoins and noted the systemic risks posed by their widespread usage.

The legislative campaign on behalf of the crypto industry, which bought its way into the political process remarkably quickly, is taking shape in the new Congress.

Under its new chair, Rep. Patrick McHenry (R-N.C.), the House Financial Services Committee will have a new subcommittee largely devoted to doing this industry’s bidding. A top McHenry aide is now cashing in as a lobbyist for Andreessen Horowitz, the venture capital giant that has funded several stablecoin startups. Tether has hired a former Trump administration appointee’s PR firm.

There’s no sign a Republican-led committee might embrace regulations or legislation that bring stablecoin issuers into a sensible framework. Perhaps further crypto company meltdowns will change minds? With so many strikes against stablecoins, and with sensible alternatives measures available, legislative giveaways are the last thing anyone needs.

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Mark Hays is senior policy analyst at Americans for Financial Reform.