Stablecoins Still Pose Risks to Electronic Payments

“Stablecoins” are a relatively new class of digital assets that may be a cheaper, more efficient way to make purchases.  A stablecoin is a type of cryptocurrency that is a more stable asset, and can have value linked to the U.S. dollar or other precious metals and cryptocurrencies.  Other digital assets often fluctuate dramatically in price, but stablecoins are designed to be more stable.

The current market capitalization of stablecoins is roughly $180 billion, up significantly from $5 billion at the start of 2020.  Stablecoins make up approximately 10% of the value of all digital assets, including cryptocurrencies.  The purpose is to provide stability of price as people are transacting across coins or between fiat and digital currencies, because crypto markets can be volatile.

Although several governments have indicated that they may seek to regulate cryptocurrencies, stablecoins are not yet subject to regulatory safeguards.  This means stablecoins may pose elevated risks to consumer and could destabilize the financial system.  With their potential use for payments, stablecoins provide other concerns.  Checks and credit cards, the most popular payment types, are critical to the economy.  If stablecoins replace credit cards and check to a large degree, digital wallets could be disrupted with widespread damaging effects.

Links between stablecoins and large businesses pose additional risks. Commercial companies have been barred from controlling banks under U.S. law. But nothing prevents commercial companies from creating and issuing stablecoins. U.S. financial regulators, the Treasury Department, and many state legislators are looking at tools that can be used to mitigate potential risks. Congress should also enact legislation to make stablecoins subject to regulation.

Last year, a report was produced recommending congressional action by the President’s Working Group on Financial Markets. The report recommended legislation requiring stablecoin issuers to obtain a bank charter. This would likely ensure standards to reduce the risk of a run, and would prevent a commercial company from issuing stablecoins. Well-designed and regulated stablecoins could offer important benefits to the electronic payments system. Legislators should help mitigate risks to consumers and the broader economy by implementing guardrails.

About the Author

David Haber is a Senior Associate with Global Legal Law Firm.  He works closely with companies to address lawsuits around the United States, and helps companies defend state investigations and adapt to new regulations.  Global Legal Law Firm also has years of experience tracking the legal developments in the electronic payments space and helping clients develop strategies for various laws and prevailing interpretations across the United States.  We have helped clients with compliance advice, drafting and negotiating business contracts, defending state and federal regulatory actions, and representation in civil litigation matters involving electronic payment companies and business disputes.