Stablecoins aren’t broken, please don’t fix them
Helen Hodler and Sam Saver meet, fall in love, and start planning their future. Sam opens a savings account and gets 0.06% APY (interest rate). More adventurous Hellen buys a stablecoin—redeemable 1:1 with a US dollar—and deposits (or ‘hodls’) it with an exchange. She gets 8.88% APY. Our well-heeled financial-policy setters like Federal Reserve Chair Jerome Powell (net worth $55 million), Treasury Secretary Janet Yellen (net worth $16 million), SEC Chair Gary Gensler (net worth $119 million) side eye Helen.
A recent report on stablecoins by the President’s Working Group on Financial Markets outlines official concerns. They think she is too unsophisticated for her choice. They think she and the exchange may pose a systemic risk to the entire U.S. financial system. The report asks Congress to solve these apparent issues but suggests federal agencies will act alone if necessary.
In reality, smothering people with financial bureaucracy brings far greater risks for our nation’s economic prosperity and stability. Instead, the federal government should allow stablecoin issuers, crypto exchanges, and the Web 3.0 revolution it will fuel to flourish.
Stablecoins are working
Stablecoins are already vital to the crypto ecosystem. Before their advent, crypto trades paired with fiat currency. Stablecoins made trading faster, cheaper, and more liquid. Although only widely used since 2017, the market has bloomed, with a current $131 billion capitalization.
People would marvel at the innovations rolling out in this short time if we were unaccustomed to the private sector rapidly solving problems. By comparison, China began working on a digital yuan in 2014 and is only now doing pilot programs. A U.S. government version is years away.
But Hellen need not wait for government to lead the way. She can choose a stablecoin backed by cash and commercial paper, or one by commodities like gold, or one governed by algorithms. She can pick one that attests its backing quarterly, or monthly, or 24/7. The market’s ‘invisible hand’ connotes each coin’s rising or falling fortunes.
Nefarious stablecoins actions have been punished
No human system is perfect. After years of questions about its reserves, , one issuer – Tether – settled with the New York Attorney General’s office over alleged shady accounting. It also paid a $41 million-dollar fine to the Commodity Futures Trading Commission. Yet the market didn’t collapse – it incorporated this information and continued ablaze. As the market matured and new entrants arrived, issuers began attesting their reserves.
All this success outside the government’s “invisible foot” alarms Washington types. Bureaucrats and allied intellectuals worry about investor protection and ‘runs’ to fiat currency. Ironically, one might argue a country $27 trillion in debt has bigger concerns than a smoothly functioning $131 billion market. Nevertheless, they persist.
Gary Gensler is the stablecoin killer
Under the guise of technology neutrality SEC Chair Gary Gensler has waged a frontal assault on crypto innovation. takes a dim view of innovation. He now seeks “plenary authority” over crypto including currency-like stablecoins.
Given the attested reserves and constant market adjustments, the chance Helen will lose her shirt or risk the financial system (absent fraud) is tiny. But government regulation carries much clearer risks. Regulators could easily become beholden to the biggest businesses they regulate. “Regulatory capture” would mean the biggest players join with regulators and lawmakers to write the rules and increase barriers to entry. This isn’t theoretical. Indeed, since the New Deal’s forlorn National Recovery Act, it has been a staple of U.S. economics.
And there is also the risk of stratification: Whatever rules regulators issue freeze current technologies at that time. This is particularly benighted given stablecoins’ role in fueling the unforeseen innovations of Web 3.0 where potentially billions of microtransactions occur every second. Helen may not only have her interest rate reduced, but the government could also deny her the benefit of the brightest minds currently conceiving ways to make her life richer and easier.
The Helens and Sams of this country ought to be able to choose the vehicles they wish for passive income and accept market risks that suit their appetite. Given the stablecoin market’s transparency, variety of choice, and constant adjustments, regulators have no problem to solve. Regulators themselves are the problem.
By Jossey PLLC
A version of this article appeared in National Review on November 16, 2021, https://www.nationalreview.com/2021/11/stablecoins-arent-broken-please-dont-fix-them/