President Donald Trump signed a law in July allowing companies to issue stablecoins. Stablecoins are pegged to the U.S. dollar to keep their value from jumping around like bitcoin and other cryptocurrency.
Now lawmakers are working on the CLARITY Act, which is meant to address how stablecoins might work, including whether they’ll siphon money away from the traditional banking system.
Companies issuing stablecoins back them with safe financial assets.
“In this case, mostly U.S. Treasury securities, and a few other types of related, very short-term assets,” said Todd Baker, a senior fellow with Columbia Business School.
Baker said when someone buys, say, $100 worth of stablecoins, the company issuing them will use the money to buy $100 worth of U.S. Treasurys, for instance. “And if you want that money back, you go back to the stablecoin issuer, and the stablecoin issuer sells some of those very safe assets, and it gives you cash.”
It’s mostly tech companies that issue stablecoins. Most people use stablecoins to buy bitcoin and other cryptocurrencies, Baker added, since stablecoins can make those transactions easier. But stablecoins can also be used to make instant payments, as long as the person receiving the payment is willing to accept stablecoins.
In other words, stablecoins are similar to traditional bank accounts: People can use them to make payments, or they can let their money sit there. That’s why many banks are concerned about what will happen if stablecoins become more popular.
“Small banks, community banks, are right to be afraid,” said Hilary Allen, a law professor at American University.
The fear is that stablecoins will draw depositors’ cash away from banks, especially if stablecoins pay competitive interest rates.
Right now, stablecoin issuers aren’t allowed to pay interest, but Allen said there are loopholes.
“There are affiliated exchanges or partners with other crypto-industry infrastructure,” she said. “They can pay yield, which is effectively interest.”
The concern isn’t only about bank competition, she noted. It’s also about where that money will end up. Because the companies issuing stablecoins store that money in Treasurys and other safe assets.
“They’re not making loans to people for mortgages,” Allen said. “They’re not making loans to small businesses to get up and running.”
That said, some banks themselves have been getting into stablecoin, according to David Schiff, senior managing director with FTI Consulting.
“The larger banks, particularly those that have a global footprint and are working with very large commercial clients that have cross-border operations, are absolutely starting to experiment,” Schiff said.
