A bipartisan bill aimed at establishing rules for so-called stablecoins could be a key step in sending the cryptocurrency industry into the mainstream.
In a procedural vote on Monday, the U.S. Senate advanced the GENIUS Act, securing the 60-vote threshold toward a full vote in the near future. The bill would create a regulatory framework to support the creation of stablecoins, which are a type of digital asset that is pegged to another currency, such as the U.S. dollar.
That includes mandating that firms that wish to issue their own coins hold a reserve of liquid safe assets to support the cryptocurrency; that holders be prioritized for repayment in the event of a bankruptcy; and that issuers adhere to anti-money laundering rules and anti-terrorism sanctions.
But Ravi Sarathy, a professor of international business and strategy at Northeastern University, has some concerns about the bill. We spoke with Sarathy about what those are.
His comments have been edited for brevity and clarity.
Stablecoins are part of this whole movement toward digital currencies. The point of digital currencies is that they’re very fast; they’re instantaneous; you get immediate confirmation of the transaction; they’re peer-to-peer, and if you do it in a public blockchain, there is a clear record and it’s immutable, it can’t be hacked, etcetera. We know there is huge interest in bitcoin; its market capitalization is almost a trillion dollars.
But the thing about bitcoin and Ethereum [Ether (ETH)] as digital currencies is that they’re very unstable. We’re seeing these huge fluctuations. This is where stablecoins come in. Instead of using bitcoin or Ethereum, you use something that has stable value because it is pegged to another currency. The idea is that you create an additional currency, and people can own it in their wallets, then send it from one wallet to another using private and public keys.
You need reserves to back that particular coin. Say I take a billion dollars and put it into a bank in the form of bank notes or Treasury bills — something that’s very stable in value — and for each dollar that I have in reserve I issue one digital equivalent. So if I have a billion dollars in reserves, I can issue up to 1 billion stablecoins. There have been instances where stablecoins have had fairly large failures because of the lack of reserve-to-stablecoin parity, and because the reserves were not properly safeguarded or segregated. Terra (LUNA) is probably the best-known example of this.
This whole issue of stablecoin regulation is predicated on the value of having a stable digital currency, and how that might help the U.S. financial sector stay competitive in world markets. The subtext here is the domination of the U.S. dollar. A lot of foreign individuals and companies, particularly in countries where currencies are somewhat volatile, might want to hold U.S. dollar stablecoins. They would take their local currency, which is highly volatile and depreciating, buy stablecoins and hold them in a wallet somewhere. That way, they would have a U.S. dollar asset. Of course, the U.S. dollar is highly used in global trade: it’s a basis for denominating trade in many parts of the world.
Part of the GENIUS Act is the idea that the U.S. government and the issuers and regulators will work with other countries that are also issuing stablecoins in their currencies. The biggest one is the euro. The European Union has a regulation — the MiCA regulation — which tries to provide a clear regulatory framework for European cryptocurrencies, stablecoins and digital instruments in general. The odds are there will be some kind of regulation in place before the end of the year in the arena of stablecoin.
I think the issue will become how well this protects consumers. For example, you and I have deposit protection of up to $250,000. I don’t see anything of the sort in the GENIUS Act. The problem with stablecoin is you need to have a private key and a digital wallet; and if you lose the private key, you can’t access the wallet. There’s also the possibility that the digital wallet could be hacked; somebody could gain access to it and take the money out really quickly. There have been cases of people losing huge amounts of money because of wallet hacks. What are the protections available to consumers if they start using stablecoins? I don’t think the bill adequately addresses deposit protection.
What actually happens if someone takes money out of your wallet without permission? If you’re using a public blockchain to run these stablecoin issuers, then theoretically when a transaction is done — that’s it. You would have to go after the issuer separately to try to get that money back. From a public perspective, I would say a majority of the public isn’t particularly savvy when it comes to using private keys and digital wallets. Everyone is familiar with Venmo and Zelle; but those are linked to traditional bank accounts and credit cards. Moving to a digital wallet is a little more complicated, but it does require an additional step.
A second issue would be concerns about concentration. In other words, would a few companies come to monopolize the industry? According to the bill, you could have either state-regulated stablecoin issuers, or federally-regulated issuers. State-regulated would be under $10 billion, so theoretically a small credit union or bank could issue its own stablecoin to its own customers. But if there’s 150 different stablecoins floating around, you’ll run into a problem if I have a stablecoin from my bank, and you have a different bank account, then you have to take my stablecoin and either keep it or list it on an exchange for a different coin, and there may be some transaction fees involved, which introduces friction into the market.
Another problem is: are state regulations going to be as strong as federal regulations, and who is going to enforce compliance? The bill notes a $100,000 a day fine, but in the grand scheme of things, $100,000 might not cut it when you look at the volume of cryptocurrencies and stablecoins being issued.
How many stablecoins do we want, and what will be the ease of interoperability between stablecoins issued by many different entities? Over time, what will happen is the largest issuers will end up dominating the industry. If Google or Amazon or Meta started launching their own stablecoins, the prospects of monopolies or oligopolies emerging poses a problem.
If this bill forces all stablecoin issuers to follow the same rules as banks — because remember: stablecoins can be issued by anyone — it will make it much easier for every bank in the U.S. to start launching its own stablecoins. That could be a big plus.
A stablecoin that is clearly regulated would allow for lower costs and faster transactions. Overall, I think that will be of some benefit to the consumer. If U.S. dollar stablecoin regulation allows for closer interoperability with foreign stablecoins, it should lower the cost of cross-border transactions, which would also be of benefit to both companies and people.