
- With over 90% of stablecoins backed on a 1:1 basis by the U.S. Dollar, stablecoins represent an important part of the fiscal and monetary policy and U.S. dollar leadership.
- Regardless of personal views of cryptoassets, investors and regulators alike should pay close attention to stablecoin developments and work toward developing effective and iterative policy positions.
- Get up to speed and read CCI’s explainer – What is a Stablecoin?
- Note: This is a guest post and only reflect the views of the author.
Cryptoassets might not come to mind immediately when U.S. monetary and fiscal policy is being discussed and/or analyzed, but that misses an important point. Stablecoins, although not utilized at the present for mainstream transactions or as a major medium of exchange in the U.S., play a critical role in the rapidly expanding crypto ecosystem. Ignoring these financial instruments and cryptoassets would be a short-sighted move on the part of U.S. investors, policymakers and crypto advocates. Despite some claims that stablecoins do not represent a true iteration of crypto due to the centralization that is embedded within them, stablecoins have quickly become a major on-ramp for individual and institutional adoption of tokenized payments. Let’s take a look at a few of the reasons why stablecoin policy is good for crypto, U.S. interests, and U.S. dollar leadership
1. Stablecoins are the next iteration of the dollar
The U.S. dollar is the global reserve currency, and despite some news coverage to the contrary there does not seem to any significant move to change that in the short to medium term. That said, there is growing competition from other currencies such as the Chinese yuan, the ever-present efforts by the European Union to expand the scope of the Euro, and the growing number of nations seeking to transact on a non-dollar basis due to sanctions and other economic measures implemented by the U.S. in the post-COVID era represent structural challenges to continued dollar leadership.
With over 80% of dollar-based transactions occurring in a virtual format, the integration of tokenization into this process is not as far-fetched as some might believe. It is worth taking stock of how stablecoins are utilized, both in the U.S. and abroad, to fully understand the importance of a U.S. stablecoin policy. While in the U.S. crypto-for-payments has yet to catch on with the retail marketplace, the appeal and demand for dollars has helped power the growth of stablecoins. Since the vast majority of transactions and value via stablecoins is dollar backed, these instruments are often used as a proxy for the dollar in international markets.
Additionally, looping back to the efforts (albeit unsuccessful for now) to supplant the U.S. dollar as the global reserve currency, any upgrades or alterations that make the dollar competitive in the medium to long term should be embraced and fully implemented. Since tokenized transactions deliver lower costs for processing, nearly instantaneous processing time and availability, and a traceable record for all parties involved, a more pro-stablecoin stance by policymakers would not only improve the position of the U.S. dollar in the present, but also help solidify a leadership position as tokenization continues making inroads in other asset classes.
2. Crypto innovation leads to other innovations
An oft-repeated refrain by some crypto skeptics is that the investment, energy, and creativity allocated to crypto projects would be better off invested elsewhere. This is simply incorrect, with major strides in energy production and grid management stemming directly from bitcoin miners setting up shop in various jurisdictions across the U.S. For all of the criticism that “crypto” faces regarding its energy usage, the 2nd largest cryptoasset (ether) voluntarily switched to drastically less energy intensive form of creating new tokens. Lastly, even for policymakers focused specifically on bitcoin, according to the Bitcoin Mining Council nearly two-thirds of all energy used for bitcoin mining already comes from non-fossil fuel sources. All of these improvements, and adoption of sustainable energy sources have come without government mandates, edicts, or other top-down approaches.
If the volatile and decentralized bitcoin can deliver those kinds of benefits, imagine the systemic benefit of comprehensive stablecoin policy.
3. Stablecoins are here to stay
With major TradFi institutions located both in the U.S. and abroad (JPM, SocGen Nomura, Citi, PayPal and others) already investing heavily in the creation and deployment of stablecoins the need for effective and objective policy conversations is paramount. The cryptoasset sector has routinely outpaced the regulatory apparatus in the U.S., and other markets, but as stablecoins continue to make inroads for both retail and institutional use the risks associated with minimal or even openly antagonistic policy will only continue to grow. Despite setbacks over the years and lingering questions about the reserve policies of some of the largest stablecoins in the marketplace, this subset of crypto has continued to grow in scope and importance.
Stablecoins are here to stay, improve U.S. competitiveness, and have continued to propel U.S. dollar leadership and crypto innovation forward. Policymakers should take note and act accordingly.
Sean Stein Smith is an Associate Professor at the City University of New York – Lehman College. He serves on the Advisory Board of the Wall Street Blockchain Alliance, where he chairs the Accounting Working Group. Sean also serves as an Advisor to Crescent City Capital, a cryptoasset investment fund, and is also an Advisor to Hyperion, a crypto accounting startup. Sean is an award-winning researcher who has been recognized in both the United States and European Union for his contributions to the accounting field. He is a Certified Cryptocurrency Auditor, and has completed an Executive Education program in Artificial Intelligence at MIT.