In the last year cryptocurrencies have gone from a niche financial tool used by a small cohort of sophisticated investors to mainstream acceptability. 55 million Americans, one in every 5, have had some sort of experience with cryptocurrency, and that number appears set to increase with the passage of the Genius Act, which is intended to create a legal framework for the use of stablecoins across the economy.
Stablecoins are the less-exciting cousin of speculative cryptocurrencies like Bitcoin or Dogecoin. While the latter ones can rise and fall–and often do, sometimes wildly–with supply and demand, the issuer of a stablecoin must back every dollar of its stablecoin with an equivalent amount of U.S. dollars or safe, liquid assets like short-term treasury bills.
The utility of the stablecoin is that its stable value makes it useful to conduct transactions that can be faster and less costly than via other methods. However, a drawback of stablecoins–for some–is that they do not pay any interest, and the Genius Act codified that prohibition. Since people can put their dollar holdings in a high-yield savings account that is fully insured by the federal government and earn up to four percent these days, that reduces the appetite for some people to hold and use stablecoins.
Some issuers bristle at that constraint, and to get around the prohibition on paying interest they have resorted to offering “rewards” to their holders, which they market as being akin to credit card rewards.
The problem is that stablecoins are in no way like credit cards, let alone bank accounts insured by the FDIC, and this workaround creates potential problems. For starters, stablecoins lack the regulatory oversight that credit card issuers or their issuing banks receive. If stablecoins chase money by offering the equivalent of interest, it could result in a stablecoin issuer attempting to attract more holders by promising greater rewards, and paying for it by investing the money backing the stablecoin in risky or less liquid assets.
A stablecoin issuer in this situation may have trouble quickly liquidating its assets and reimbursing its holders. Even a temporary inability to make its holders whole may result in a run on that stablecoin.
A shortfall in one stablecoin could lead to investors in other stablecoins fearing a similar shortfall, triggering a run across the asset that lacks anything resembling deposit insurance or regulatory oversight. Such an outcome would undermine the stability of the entire stablecoin environment, and could potentially spread beyond the cryptocurrency market as well.
The payment of “rewards” also goes against the intended purpose of the stablecoin, which is to facilitate financial transactions. Repurposing it as a receptacle for investors to park money would siphon money out of the banking system, reducing the amount of capital available for lending and investment. Stablecoins are not an acceptable substitute for such activities since the money backing them cannot be put into such activities.
The United States has remarkably flexible and robust capital markets that have rapidly evolved through the years to encompass a wide range of financial assets, and this flexibility is a primary reason that the U.S. economy has proven to be so robust in the last few decades. The advent of stablecoins has the promise of allowing banks and other financial institutions to conduct transactions faster and cheaper than is currently possible, and the Genius Act will accelerate their adoption.
At this nascent stage, it is important that the government take steps to help people come to have faith in the stability and validity of stablecoins, and allowing the payment of interest–or some clever workaround such as rewards points–threatens to undermine those efforts.
