The regulators have the perfect opportunity to craft thoughtful and strategic policy on stablecoins and other crypto assets.
Stablecoins Come with Major Benefits to Users and the United States
One of the most painful moments in crypto history was perhaps the week when terraUSD (UST) collapsed. It caused losses in billions as the stablecoin lost its peg to the US dollar. As Washington debates the next steps, it is prudent to make the conversation thoughtful.
Stablecoins are notable innovations which come with a long list of benefits to users and the United States.
- Can help to give the US a competitive advantage.
- Helps to improve the efficiency of both transfers and payments, resulting in reduced transaction costs and faster settlement for consumers and businesses.
- Makes the financial system more inclusive by allowing open access for all, no matter the location, background, or economic status.
- Stablecoins are crucial in advancing the US geopolitical interests. Particularly, they help to enhance the dominance of the US dollar amidst the growing attempts by adversaries, such as Russia and China, to undermine the US leadership in the financial system.
How Do Stablecoins Work?
As their names suggest, stablecoins are developed to ensure they are stable and reliable. They fall into two main categories:
- Custodial Stablecoins
These stablecoins are issued by a centralized administrator and supported by collateral held in reservoirs, such as banks. They are held at a ratio of 1:1, implying that for every coin, there is a corresponding dollar in store.
- Decentralized Stablecoins
These coins work like public blockchains, helping to eliminate dependence on intermediaries. They achieve this by creating a stablecoin that targets maintaining a peg to the US Dollar via a type of autonomous code and not a central issuer.
UST was in its own category because it relied on algorithmic mechanisms to maintain its price stability. There was no collateral, which made it a pretty risky type of asset.
Three Suggestions of How Policymakers should Respond to UST Collapse
In light of the UST woes, here are three suggestions on how the US policymakers can respond.
- Follow the process initiated by President Joe Biden’s Executive Order: The US Treasury Secretary Janet Yellen called for the implementation of the executive order. The order called the federal agencies to study the cryptos and set regulatory priorities.
- A bipartisan consensus should be adopted in Congress. Immediately after the UST collapse, Congress was quick to take a bipartisan approach, but this was the wrong approach. As the President’s Working Group on Financial Markets (PWG) recommended in 2021, the regulation should come from Congress and not the regulatory agencies.
- New regulations should be crafted specifically for the crypto niche. They must be balanced and factor in the core goal of making the dollar dominate other stablecoins.
Stable coins present an excellent opportunity for the US, and we cannot risk getting it wrong. The United States is in a race to become the home of Web3, and it is time for prompt action. The future of the nation as a hub for crypto innovations hangs in a delicate balance.