On June 17, the US Senate approved – with bipartisan support – the Genius Act (Guiding and Establishing National Innovation for US Stablecoins Act), which was ratified by the House of Representatives on July 17. It is now law.
This law sets out the regulatory framework for stablecoins (see our In-Depth Analysis of March 18) on the US market. Regulation essentially means that stablecoins can be officially accepted as payment in the same way as a bank transfer or credit card. The United States thus joins Japan, which regulated the sector in 2022, Singapore in 2023, and Abu Dhabi in 2024. England is taking its time and thinking it over; Europe, on the other hand, has decided to go down the path of central bank digital currency (CBDC), reserving specific regulations (MICA) for stablecoins, which excludes them from being accepted as an official means of payment.
The major US banks have come out in favor of this change. Understandably under pressure from non-banking sector initiatives (e.g., Uber or Walmart) intent on issuing stablecoins for retail payments, they can now embark on this new business in a more certain regulatory framework. In fact, JPMorgan has stated that it not only wants to open stablecoin accounts and use them as a means of payment, but is also considering using customers’ cryptocurrencies as collateral for loans (except that it must resolve the issue of collateral redemption in the event of default, a problem for which it will probably have to resort to collaboration with technology partners).
However, we are interested in understanding the systemic implications of this regulatory framework a little better. First of all, the Genius Act sets out very specific conditions for stablecoin issuers, which, let us remember, are private companies not subject to regulation like banks, for example. Now, for a private company such as Circle or Tether to issue a stablecoin that can be used as an official means of payment in the United States, it must have collateral in a one-to-one ratio with the fiat dollar or US government securities (and this is a crucial aspect of the entire regulation).
This general legislative framework will then need to be supplemented with practical details, but we already know that stablecoin issuances granted to any company (not necessarily banks and financial intermediaries), including those related to the President, will be subject to state regulation if they do not exceed ten billion dollars and to federal jurisdiction if they do. This means that the ground has been laid for the issuance of many stablecoins by many companies, many of which are subject to different laws. Two other related laws contribute to creating the regulatory framework: the Digital Asset Market Clarity Act, which aims to define precisely which assets should be considered securities and which should not, and the Anti-Central Bank Digital Currency (CBDC) Act, which we will discuss in conclusion.
Although supporters of this regulatory body see benefits in the competition that will arise within the payment market, capable of reducing transaction costs, detractors foresee the emergence of a chaotic situation and, above all, the nullification of competition should Gresham’s law prevail, whereby “bad money drives out good”. It could happen, in fact, that stablecoins with less than ten billion in capitalization are backed by individual state securities rather than Treasuries and are therefore rightly perceived as “bad” money to be used in payments, as opposed to good money to be used as a store of value.
Some economists point out that this situation is not unlike the Free-Banking Era, on a much larger scale. This period in US history lasted from 1837 to 1863: banks operated with minimal federal supervision and could issue their own currencies backed by individual state bonds. The period ended with the National Banking Act of 1863, which aimed to establish a more regulated banking system. The lack of regulation had led to numerous bank failures and a decentralized banking system.
The sticking point of this legislative initiative lies precisely in the fact that those who want to issue stablecoins must buy dollars or government bonds (Tether alone has more on its balance sheet than Germany, to give you an idea), thus financing the US debt: for the US treasury, the benefit will be determined by the fact that the purchases will raise bond prices and therefore reduce rates. On the contrary, any problem could lead stablecoin holders to request conversion into fiat currency, forcing the issuer to sell part of the government bonds used as collateral, causing their price to fall (and interest rates to rise), which would also deplete the value of other issuers’ reserves. It could therefore be the case that the rush to convert could lead to a mass of currency in circulation that is not adequately backed by the value of the issuers’ reserves, causing waves of panic that are completely counterproductive and capable of triggering an avalanche of conversion requests. We have already seen this during the Free-Banking Era when so-called ‘wildcat banks’ sprang up like mushrooms (i.e. without authorisation, because it was not required), issuing currency backed by state and non-federal bonds with the possibility of issuing at the nominal value of the bonds (i.e. at par) even if their market value was significantly lower; this allowed banks that sprang up overnight to make an immediate profit in the event of a depressed bond market: however, all that was needed was to bring the depreciation of the bonds to the public’s attention to trigger a rush for redemption.
However, with stablecoins, it could be even worse because issuance is also permitted to non-financial institutions, which could then lose credibility—and with them, the stablecoins they have issued—for a thousand reasons related to their core business. On the other hand, stablecoins have a very liquid secondary market, so holders will not necessarily request conversion into fiat currency but will be able to sell the stablecoins. This risk could be mitigated with the digital dollar issued by the Fed as lender of last resort (just like the fiat dollar) and by removing government bonds from issuers’ reserves. But this is exactly what the US administration does not want, as amply demonstrated by the Anti-CBDC Act, which explicitly prevents the Fed from issuing the digital dollar.
Disclaimer
This post expresses the personal opinion of the Custodia Wealth Management staff who wrote it. It is not investment advice or recommendations, personalized advice, and should not be considered an invitation to carry out transactions on financial instruments.
