Stablecoins have come into focus on Thursday, as Democrats opposed legislation aimed at creating a legal pathway for the digital tokens.
Stablecoins are privately issued digital currencies. Proponents like to refer to them as “digital dollars” that are akin to in-store credits a consumer might find at a retailer.
Unlike other forms of crypto, like Bitcoin, whose values fluctuate, most stablecoins’ values are “pegged,” or set at equivalent to, real-world currencies like the U.S. dollar.
Stablecoins are in an early stage of evolution and, for now, most consumers don‘t interact directly with them.
Instead, they are primarily used by large crypto exchanges and a growing group of traditional financial institutions as part of “back-end” functions that involve converting crypto into regular currencies, and vice-versa.
If an exchange operates in multiple countries, and/or trades in multiple cryptocurrencies — but would prefer to avoid having the value of its holdings fluctuate — it will usually seek to convert its holdings into stablecoins.
“A lot of [companies] do global card processing and use different payment service providers,” said Kevin Lehtiniitty, founder of Borderless.xyz, a stablecoin platform. “They use Stablecoins to repatriate those funds back to U.S.”
So far, stablecoins have been operating in a legal gray zone. The GENIUS Act that had been under consideration in the Senate — with an equivalent bill in the House — seeks to provide standards for firms that issue stablecoins. Among those standards is a consideration for how much dollar reserves the firms must have on hand when they issue a coin, what rights customers have for redeeming them, and what protections they offer so that “runs” on the stablecoins are avoided if something breaks down.
Historically, the stablecoin market has not been immune from major collapses, and some regulators remain sensitive about granting too much leeway to stablecoin operators. The Securities and Exchange Commission’s lone remaining Democrat, Caroline Crenshaw, has criticized President Trump-backed SEC’s recent statement on stablecoins as containing “legal and factual errors” that “paint a distorted picture” of the tokens that “drastically understate” their risks.
In particular, she said, most stablecoins are issued through third-party exchanges that have been “lightly regulated or not regulated at all.”
The SEC’s policy feeds “a dangerous industry narrative about the supposed stability and safety of these products,” Crenshaw wrote.
“Make no mistake: There is nothing equivalent about the U.S. dollar and unregulated, privately-issued crypto assets that are opaque … uncollateralized, uninsured, and laden with risk at every step of their multi-layer distribution chain. They are risky business.”
But stablecoin advocates say the new legislation would have helped provide consumer protections while allowing innovation to occur. In particular, the bill provided reserve requirements, similar to ones that regular banks face, that ensured a stablecoin user is able to redeem their holdings for the exact amount they are worth.
“A lot of safety measures are being added to these bills,” said Cody Carbone, CEO of the crypto industry’s primary lobbying group, The Digital Chamber, adding that they “ensure that we can keep financial stability in place if there’s a black swan event.”
