Breakingviews - Uncle Sam's stablecoin passion has shaky rationale

Reuters

5 hours ago

LONDON, June 19 (Reuters Breakingviews) - Uncle Sam is going all-in on stablecoins. President Donald Trump backed, opens new tab the privately issued cryptocurrencies whose value is pegged to the U.S. dollar within days of his inauguration in January. Now Congress is poised to legislate, after the Senate this week approved the Guiding and Establishing National Innovation for U.S. Stablecoins – or GENIUS - Act.
The newly supportive regulatory environment has drawn a flood of interest from potential issuers, from major banks, opens new tab to retailers, opens new tab such as Walmart (WMT.N), opens new tab and Amazon.com (AMZN.O), opens new tab, according to media reports. Meanwhile stablecoin specialist Circle Internet, opens new tab(CRCL.N), opens new tab, which listed on the New York Stock Exchange this month, has a digital dollar surrogate, USDC, which already has coins worth over $60 billion in circulation, opens new tab.
Commercial interest is nothing new. Tech-savvy American corporates have long recognised stablecoins as the one species of digital money with a compelling mainstream use. The first generation of cryptocurrencies such as bitcoin offered not just a way of digitally storing and transferring value, but the ability to denominate it in their own standard units. That model caught on with speculative traders but never made much headway in the world of digital payments. Stablecoins, by contrast, combine the novelty of global, real-time availability and programmability with the familiarity of national currency units. That makes them uninteresting as speculative bets – but well suited as methods for payment.
A simple comparison shows how the two models serve different purposes. Bitcoin – the original and by far the largest own-standard cryptocurrency – has tokens in circulation worth $2.1 trillion. That's nearly 10 times the value of the two biggest stablecoins, USDT and USDC, combined. Yet when it comes to transactions, the leaderboard is reversed. Less than 3% of those bitcoins change hands in a 24-hour period, compared to nearly 40% of the two stablecoins.
The payments business is a big target for disruption. Visa (V.N), opens new tab and Mastercard (MA.N), opens new tab – the two largest processors of fiat currency payments – reported combined revenue of $74 billion last year and enjoy net profit margins of around 50%. That's quite a market at which to take aim. Moreover, stablecoin issuers collect interest on the collateral backing their digital coins as well as harvesting transaction processing fees. That's how Circle made a cool $1.7 billion in revenue last year.
It's not hard to see why potential stablecoin issuers have been lining up for years. Nevertheless early projects flopped, notably Facebook owner Meta Platforms' (META.O), opens new tab ill-fated 2017 Libra stablecoin, opens new tab. That's because regulators and central bankers have not been nearly so keen. Three potential gremlins have been uppermost in their minds.
The first is what would happen if stablecoins are not backed by sufficient high-quality, liquid collateral to make them redeemable at par on demand. A plague of pseudo-U.S. dollars would then circulate at varying discounts to the real greenback. That would undermine the so-called 'singleness of money, opens new tab' and destroy the co-ordinating role of the U.S. dollar as a unit of account.
The regulators' second bugbear is the black economy. They fret that because stablecoins are effectively 'bearer securities', like physical banknotes, they are subject to know-your-customer and anti-money laundering rules only when their users seek to convert them into traditional bank deposits. In the meantime, they can be used to make payments anonymously just like physical cash.
Finally, there is the risk that stablecoins erode the effectiveness of monetary policy. Physical greenbacks may be hard to track, but they are still issued by the U.S. Federal Reserve. A stablecoin issued by Amazon or Walmart might settle a macroeconomically significant volume of transactions between its customers and suppliers without ever formally touching the dollar. That could scramble the Fed's attempts to manage inflation by constraining liquidity.
Yet none of these objections are new. Prudential risks are already a concern for money market funds and traditional banks. The anonymity of transactions is a feature of physical banknotes. The dilution of monetary policy is a familiar gripe of central bankers in emerging markets, where foreign currencies such as the dollar or euro often circulate alongside the national unit. What spooks regulators in the developed world is less the novelty of the risks than the frightening scale, scope, and speed which digitisation allows. That implies work-arounds can probably be found, especially if a unified clearing and settlement protocol connecting stablecoins to the traditional financial system, such as the ubyx, opens new tab concept announced this week, are adopted.
Until this year, the caution of the regulators trumped the commercial interests of potential stablecoin issuers. What has helped to unblock the GENIUS Act is that the U.S. government believes it has spotted a fiscal benefit.
Treasury Secretary Scott Bessent set out, opens new tab his reasoning immediately after the Senate approved the act. 'A thriving stablecoin ecosystem will drive demand from the private sector for U.S. Treasuries, which back stablecoins,' he wrote: 'This newfound demand could lower government borrowing costs and help rein in the national debt.' What's more, he argued, stablecoins could 'onramp millions of new users – across the globe – to the dollar-based digital asset economy', effectively opening up a new frontier of overseas funding for the U.S. budget deficit.
Bessent cited projections that the stablecoin market could top $3.7 trillion by 2030. That's certainly not small change. It would be more than sufficient to soak up the $3 trillion that nonpartisan experts reckon, opens new tab Trump's One Big Beautiful Bill Act will add to the national debt over the next 10 years.
Unfortunately, things are not so simple. The Treasury already effectively enjoys free foreign financing via overseas demand for U.S. dollar banknotes. The Fed estimates, opens new tab that over $1 trillion of them currently circulate abroad. If dollar-backed stablecoins simply replace demand for physical notes, there will be no net fiscal benefit.
Another niggle is that while purchases of stablecoins may help finance the national debt, the tokens could facilitate more payments that fly under the radar of the Internal Revenue Service (IRS). In 2022, the IRS estimated, opens new tab that nearly 12% of U.S. taxes go missing due to underreporting, implying a shortfall of around $600 billion in the most recent fiscal year. A surge in stablecoin usage could easily make that worse.
Given the compelling commercial case and the likelihood that regulatory risks can be managed, it is ironic that the potential fiscal dividend that has finally convinced the U.S. government to bank on stablecoins is the shakiest rationale for embracing them.
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