Misconceptions persist regarding stablecoins' intricacies among skeptics
In a significant move for the digital currency landscape, the GENIUS Act has been signed into federal law, establishing a uniform legal framework for stablecoins in the United States. This new law aims to ensure the continued operation of stablecoin issuers, while also addressing the three main criticisms raised by Marcelo Prates, Policy Director at the Stellar Development Foundation.
The three criticisms revolve around the potential for stablecoins to undermine financial stability, opportunities for regulatory arbitrage, and the risk of creating systemic vulnerabilities in the financial system. To combat these concerns, the GENIUS Act mandates regulators to create rules for each stablecoin issuer's business model and risk profile.
One of the key features of the GENIUS Act is the insolvency rules for regulated stablecoins. These rules prioritize stablecoin holders over other creditors and allow for early use of stablecoin reserves to satisfy customer redemptions. This measure is designed to prevent the kind of runs and losses experienced by prime money market funds (MMFs) during the 2008 financial crisis. Unlike government MMFs, which were not affected during the crisis, prime MMFs such as the Reserve Primary Fund suffered losses due to exposure to Lehman Brothers' commercial paper.
Capital and liquidity requirements for regulated stablecoins are also in place to prevent issuers from having to sell reserves at a loss in extreme circumstances. This is a significant step towards ensuring the lasting stability of stablecoins.
The role of stablecoins in faster, more efficient cross-border payments has also been acknowledged by the Bank for International Settlements. Additionally, the transparency of blockchain technology can make the combat against illicit activities more effective, as assets circulating on these networks are easier to trace.
However, it's important to note that the misconception of the 'singleness of money' has no basis in reality. The value of bank deposits can vary based on the US bank and government intervention, and stablecoins are not reliant on deposit insurance or government backing. Instead, they are fully backed by liquid reserves that cannot be reused for other purposes.
Despite these advances, concerns about the potential instability of stablecoins persist. Critics argue that the history of money market funds in the US, specifically the 2008 financial crisis, demonstrates the risks associated with these digital assets. However, understanding and managing these risks is essential to unlocking the full potential of stablecoins as regulated assets.
As the regulatory landscape for stablecoins continues to evolve, it's clear that the GENIUS Act is a significant step forward in ensuring their legal soundness and stability. With these new rules in place, stablecoins can now comply with federal law, paving the way for their continued growth and adoption.
