26th April 2024 > > Stablecoin regulation.

tl;dr

Fully collateralised and highly regulated dollar stablecoins will be of immense benefit to all of humankind. Now is our time. The crypto revolution is about to get serious.

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Curious Cryptos’ Commentary – Stablecoin regulation

The logjam created by Gary Gensler, chair of the SEC, preventing crypto regulation, and supported by Senator Elizabeth Warren and her anti-crypto army (now deprived of Jamie “you cannot fire me” Dimon) might soon be broken.

The Lummis-Gillibrand Payment Stablecoin Act – a rare example of a bi-partisan approach – has been introduced to the Senate, and it could prove to be a game-changer for TradFi adoption:

https://www.gillibrand.senate.gov/wp-content/uploads/2024/04/LIP24254.pdf

Weighing in at 179 pages long, even my enthusiasm for all things cryptos is somewhat diminished at the prospect of spending hours reading every dry and dull page. Fortunately, the analysts at S&P have done just that for us:

https://www.spglobal.com/ratings/en/research/articles/240423-your-three-minutes-in-digital-assets-new-rules-could-boost-u-s-stablecoin-adoption-13083275#:~:text=Regulatory%20clarity%20should%20encourage%20banks,maximum%20issuance%20of%20%2410%20billion

The key elements are these, though S&P’s interpretation of them is somewhat different to mine:

- Stablecoin issuers will have to maintain cash or cash-like reserves at a ratio of at least 1:1. This is the least contentious but the most urgent regulation for the entire crypto industry.

- Non-banks will be capped at an issuance level of $10bn, whilst US banks will have no such limitation (never forget that the primary purpose of much of the regulation from financial services to agricultural commodities is to prevent competition. It is not to protect individuals, though it is often couched in those terms).

- A ban on algorithmic stablecoins. Though in principle I abhor bans, I shyly admit this is one I do approve of. It won’t work of course, bans never do. But I agree with the sentiment. However, there are better and more effective ways of achieving the same end.

S&P have little more to say, which is disappointing. The analysts had an opportunity to understand the power of this legislation, and failed to do so.  The CCC will have to take on that mantle.

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This regulation, if passed by both houses, will entice large TradFi banks into issuing stablecoins linked to the US dollar, embedding cryptos into the financial system. This is one huge benefit arising out of the US’s stance that the Fed cannot issue a US CBDC without express approval from the legislature, which is never going to happen.

Democratic Senator Kirsten Gillibrand explains:

“… (stablecoins are) absolutely critical to maintaining the U.S. dollar’s dominance, promoting responsible innovation, protecting consumers, and cracking down on money laundering and illicit finance.” 

Note that this reference to money laundering and illicit finance relates to the legacy system which has resulted in J.P. Morgan, taking one bank purely at random, being fined TWO HUNDRED AND SEVENTY-TWO times since 2000 for illegal activity, paying nearly $40 BILLION for money laundering for drug traffickers, tax avoidance, and other assorted criminal activities.

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Stopping J.P. Morgan from being a conduit for illicit activities, given that fines don’t seem to work however large they may be, is already a great outcome. But there is so much more to the impact of this bill.

Issuing a stablecoin will be a highly lucrative business for any TradFi bank.

A 5% return on 100s of billions of dollars (or more) with no capital charge to the balance sheet, plus the crossover business bringing in new relationships and associated fees, is way juicier than any other financial opportunity out there.

The competition will be fierce. Really, really fierce.

This competition will force transaction costs for all dollar remittances both within the US and for cross-border payments to zero, giving a welcome boost to productivity, lowering the cost of capital for industry, and making us all wealthier.

Better than that, it is likely that individuals and corporations will be paid for making transactions in fully collateralised, highly regulated stablecoins, rather than being charged for using fiat.

You gotta love the crypto revolution.