No one is being honest about stablecoins.
Happy Friday, Fintech Takers!
We’re almost there!
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Put simply, I’m getting pumped!
It’s been a lot of work to put together, so today’s newsletter is going to be short and sweet.
- Alex
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No one is being honest about stablecoins.Copy anchor linkCopied
I’m not naive.
I know that winning in policy and regulatory fights is about power, not persuasion.
Russ Vought didn’t change his mind on 1033 because he read the amicus briefs submitted by the FDATA, Consumer Reports, the Financial Health Network, SaverLife, and Public Citizen in the BPI lawsuit and found them intellectually convincing.
He did it because Tyler Winklevoss tweeted.
It’s going to be the same story with stablecoins. Industry trade associations have been submitting comment letters to the Treasury Department in response to its ANPR on the implementation of the GENIUS Act. However, we all know that, at the end of the day, the decisions that get made on stablecoin policy are going to be made based on political considerations, more so than legal or regulatory ones.
Given that, I really shouldn’t care too much about the comment letters and blog posts and tweets from industry trade associations. They’re window dressing. They don’t really matter.
But you know what? I do care. I care deeply because the arguments made by these organizations are often so disingenuous and sometimes downright asinine that I just can’t let it go.
So, in the time-honored tradition of getting mad at things that don’t matter and that you can’t change, let’s quickly review some of the worst arguments being made in the current stablecoin regulation debate.
Specifically, I want to focus on two topics:
1. How risky are stablecoins?Copy anchor linkCopied
The bank trade associations have been working overtime to make the case that GENIUS Act-compliant stablecoins could be riskier than they might appear. They will cite examples from the recent past, such as the 2023 USDC depeg:
USDC traded below $1 around the default of Silicon Valley Bank (SVB) in March 2023. Because USDC kept 8 percent of its reserves deposited at SVB, troubles at SVB quickly spilled over to USDC. The run on USDC started on March 9, when investors doubted Circle’s ability to access its deposits at SVB amid the bank’s imminent collapse, causing the price of USDC to trade as low as $0.87 per coin.
This is a very dumb example to use (Senator Warren uses it in her letter as well) given that the stress on USDC came from bank-deposit concentration, which is a risk that can be reduced by implementing the GENIUS Act in a way that emphasizes T-bills/overnight repo/MMF exposure and clear redemption operations.
On the flip side, the crypto lobby is so comfortable with the risks posed by stablecoins that they are pushing regulators to define “Payment Stablecoin” narrowly and to ensure that the implementation of the GENIUS Act does not harm or even disrupt stablecoin-like synthetic or algorithmic tokens:
Clarity is needed on how stable-value tokens that do not fall within the definition of a Payment Stablecoin will be treated in the United States. Many such non-Payment Stablecoins are currently accessible in the United States, and both issuers and consumers should have confidence that these products will not be barred, or face disproportionately harsh regulation.
This is a bad argument because it completely ignores the very likely possibility of consumer confusion regarding the differences between stablecoins and “stable-value tokens” (to borrow the Blockchain Association’s language) and the associated risks of each, especially if those stable-value tokens are offering more compelling yield or rewards.
And that brings us to our second topic …
2. Should stablecoins come with yield?Copy anchor linkCopied
My god, the arguments for and against yield-bearing stablecoins are so bad and so dumb.
The crypto lobby argues that Congress intended to only ban stablecoin issuers themselves from offering yield, and any other entity offering yield or rewards is perfectly aligned with the GENIUS Act’s intended purpose:
Including third parties that are not referenced in this provision would go beyond Congress’s ntent of prohibiting issuers from paying holders interest or yield solely for holding, using, or retaining Payment Stablecoins.
Ohh please.
The GENIUS Act prohibits issuers from paying the holder of a payment stablecoin any form of interest or yield, solely in connection with the holding, use, or retention of such payment stablecoin. It specifically directs federal payment stablecoin regulators to issue regulations as necessary to carry out this requirement, and “to prevent evasion thereof.”
Coinbase provides a good example. The company owns an equity stake in Circle and has a lucrative revenue share agreement in place for USDC held on its platform, which means that Coinbase offering rewards for Coinbase users holding USDC clearly falls under the umbrella of “evasion”. Arguing otherwise is absurd.
However, rather than simply making that narrow and very logical argument, the banking lobby went further. Much further:
The payments of interest or yield that the GENIUS Act prohibits should be viewed as effectively including any economic benefit that may be provided by an issuer, directly or indirectly (such as through an affiliate or partner), with respect to the payment stablecoins it issues
Ohh come on! That is completely unworkable! It would sweep up ordinary, independent promotions and business arrangements unrelated to issuer funding or control. Even something as benign as a merchant offering a 2% discount for customers who pay with stablecoins, while also using that stablecoin issuer’s API for payment processing (h/t to J.W. Verret for this hypothetical example). Do we really want the Treasury Department monitoring every third-party incentive and trying to trace back the funding and/or intent to the stablecoin issuer? Would that even be possible?
Landing the PlaneCopy anchor linkCopied
Implementing the GENIUS Act, in a post Loper Bright world, without getting sued by everybody for eternity is a near-impossible task already. It would be nice if lobbyists didn’t make it even more difficult by flooding regulators with stupid arguments.
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Thanks for the read! Let me know what you thought by replying back to this email.
— Alex
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