By Paul H. Jossey, Competitive Enterprise Institute
Pick any global hotspot and search it with the term stablecoins. On the first search result page you’ll likely find Hong Kongers, Ukrainians, Argentinians, or Venezuelans using these dollar-pegged digital assets to maintain purchasing power, convert from riskier assets (like mismanaged currencies), or simply survive under tyrannical governments.
It’s an amazing rise for an asset class that barely existed five years ago, from crypto-trader convenience to global supplier of economic security and a current $153 billion market cap. For Americans and the U.S. economy, widespread dollar-pegged stablecoin use has the added benefit of securing the dollar’s future standing as the world shifts to internet money and stablecoins become its reserve currency.
Welcome to the new world of crypto dollarization.
“Dollarizing” as an economic concept is not new. Some Latin American countries acquiesce to outsourcing monetary policy to the U.S. as their citizen’s widespread preference for U.S. dollars become undeniable. Dollars import financial stability and a degree of property rights often lacking in poorer nations. Dollarized countries tend to be less miserable on Johns Hopkins University economist Steve Hanke’s “Misery Index.”
Dictators, of course, do not like ceding financial authority to the U.S. El Salvador tried to maintain control by making Bitcoin legal tender while maintaining transactional control through government-supplied crypto wallets. Others, such as Argentina have used an age-old trick of corrupt governments, stealing dollars that were not theirs. The crypto version of dollarization with its digital wallets and partial escape from officious eyes offers a better way and hope for distressed people the world over.
The potential for dollar-backed stablecoins is so great that Jeremy Allaire, CEO of stablecoin issuer Circle, remarked in congressional testimony last year the U.S. was “winning the digital currency space race.” When people are left to choose, they choose the U.S. economy.
Yet stablecoin success has caused angst in the haughty world of global finance as well as the central banks of individual countries.
In the U.S., Congress will be debating a proposed stablecoin bill soon. This follows the President’s Working Group stablecoin report in November 2021 that warned of myriad risks and demanded Congress act or it would deploy the extraordinary powers granted by the Dodd-Frank financial legislation to unilaterally force stablecoins into the highly regulated banking regime.
The European Union and China are racing to produce knockoff government versions known as Central Bank Digital Currency (CBDC). This, despite lackluster support for these government monitored and controlled CBDCs in jurisdictions where authorities bother to ask.
International bodies like the global central banking authority the Bank for International Settlements and International Monetary Fund produce paper after paper warning potential stablecoin risks including their go-to boogeyman: money laundering.
Yet the warnings of rampant financial instability, stablecoin runs and contagion seem unfounded. Algorithmic stablecoin TerraUSD did spectacularly fail, taking down around $45 billion with it. But most stablecoins, including the biggest, are backed by actual assets like dollars, short-term government securities, or commercial paper. And they publish their reserves with third-party attestation on regular intervals. Because of this, TerraUSD’s collapse had little lasting industry effect.
Stablecoin regulation should focus on codifying best practices of publishing reserves and attestation and avoid extreme proposals like forcing them to become federally chartered banks or banning them outright. Lawmakers could accomplish this with a federal license that requires publication of reserves without dictating compositions (whether dollars, commercial paper, digital assets, or something else) and leaving the market to sort out winners and losers. The license should also preempt state-by-state regulation that is unsuited for the internet age and declare stablecoins are not securities and thus beyond the reach of the Securities and Exchange Commission. Congress should bar this agency with its overtly crypto-hostile chair Gary Gensler from stablecoin regulation.
Stablecoins provide a glimpse into the future’s money. It could be a dollar-centric future with benefits for decades to come to the US economy. But that choice lies with the current Congress. It should nurture the budding stablecoin industry with a market and consumer friendly approach. Doing so would provide benefits to Americans and the world.
Paul H. Jossey is an adjunct fellow at the Competitive Enterprise Institute and author of A Market Approach to Regulating Stablecoins, the Future’s Money.