Congress keeps talking about regulating stablecoins but doing nothing. It’s a lapse that poses growing dangers to investors, the financial system and even (perhaps) national security.
Don’t be fooled by the name: Stablecoins pose some of the greatest risks of any digital asset. The companies that issue the coins, led by Tether Holdings Ltd.’s USDT, offer the crypto equivalent of a dollar (or some other currency or reference asset). Instead of undergoing the huge price swings that seem normal in other digital assets, stablecoins are supposed to preserve their value.
That promise of stability is the key to their unique risk. It has made the tokens a favorite vehicle for payments and transfers in the crypto markets, attracting more than $160 billion. (Securities and Exchange Commission Chair Gary Gensler has called stablecoins the “poker chip” that facilitates speculation in crypto markets.) But there’s no federal law or regulation ensuring that stablecoin issuers keep that money in safe and liquid assets that can be swiftly exchanged for dollars.
Lawmakers shouldn’t waste any more time. They need to pass legislation that addresses two glaring risks.
First, stablecoins need to be stable. That means they must be able to prove, on an audited basis, that they’re backed by actual dollars.
Two popular coins demonstrate the problem. With a market capitalization of $111 billion, Tether’s USDT has surged in value despite long-standing questions about its underlying assets. A 2021 settlement with New York state required the company to start providing quarterly reports on its assets. Tether’s latest report showed that while most of its assets were in cash and short-term government debt, almost 16% was in corporate bonds, precious metals, secured loans, Bitcoin and the opaque category of “other investments.”
By contrast, its nearest rival, the $33 billion USDC, issued by Circle Internet Financial Ltd., takes a more conservative approach. It reports that its assets are all in cash at reserve banks or in its own SEC-registered government money-market fund composed of cash, short-term Treasuries and overnight repurchase agreements. That sounds reasonable. But even cash reserves can be at risk if they’re not in safe hands. USDC learned this when it briefly lost its peg to the dollar during the March 2023 failure of Silicon Valley Bank, where $3.3 billion of its reserves were held.
A link between stablecoins and Treasuries poses its own danger. Paul Ryan, the former House speaker, recently speculated that sensible legislation could boost the tokens’ market value into the trillions. That, he said, would increase demand for Treasuries to back them. But in that scenario, a run on a major stablecoin could lead to massive selling of Treasuries, radiating distress across the wider financial markets.
Uniform standards for the assets backing stablecoins would prevent such mayhem. Failing that, regulators should create a limited national charter that would require an issuer’s virtual dollars to be backed by real ones at the Federal Reserve.
A second vulnerability created by stablecoins is to law enforcement and national security. The US government relies on the banking system to monitor payments and ensure that dollars aren’t being used by criminals, terrorists or countries under sanctions. Since stablecoins make it easy to move money without banks, it’s no surprise that they’ve been linked to illicit finance. (Tether has, in some cases, frozen suspicious accounts.)
Like banks, stablecoin issuers should be required to monitor transactions and comply with law enforcement orders to freeze or seize digital assets. Those that don’t make a reasonable effort to prevent criminal transactions or enforce sanctions should have their access to the US banking and financial system cut off.
Stablecoins, like bank deposits or money-market funds, are supposed to be risk-free claims on dollars. Without proper safeguards, they’re likely to be anything but.
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