Stablecoins are digital tokens which, unlike pure crypto currencies, are pegged to financial assets, usually denominated in US dollars
The "Guiding and Establishing National Innovation for US Stablecoins Act" or GENIUS Act, supported overwhelmingly by the Senate on June 17th (68 votes to 30), requires entities issuing stablecoins, such as banks or companies, to hold $1 in cash, or in short-term assets (mainly US Treasurys), for every $1 in stablecoins they give out
With a federal framework, aimed at transparency, regular disclosure and audits of stablecoin issuers, the legislation proposed by the Senate, and still to be voted on by the US House of Representatives, is expected to bring the coins into the mainstream for retail transactions
The ecosystem of stablecoins, concentrated today on 10-year old Tether coins ($150 billion in circulation) and on Circle Internet
The financial innovation, advertised as revolutionary by crypto enthusiasts, raises questions of interest
- Are stablecoin issuers in fact acting like 'banks' ? and are the sums allocated to the coins just 'deposits' ?
- How do the entities issuing coins fit in the existing financial framework ? Are the payment services provided likely to displace traditional actors (such as legacy banks and credit card companies) ?
- Are the new payment services unique ? Are new approaches, already implemented or experimented internationally, likely to limit the scope of US-based stable coins ?
- What risks can be identified at this early stage, exposing users of stable coins ? or impacting legacy financial institutions ?
In a nutshell, an issuer of stablecoins exchanges dollars for a number on the secure ledger of a blockchain system, such as Ethereum or Ripple
Ownership of that number entitles you as 'owner' to send your number around, one transaction at a time, and have it updated on the ledger
At some point, the last 'owner' may convert the number back in the corresponding number of dollars
Stablecoins are intended to offer decentralized, efficient and low-cost transactions
Efficient and confidential transactions
Qualification of stablecoin issuers as bank or non-bank entities should be moot
Aligned with what the services of a simple 'deposit only' bank would look like, stablecoins are the equivalent of transferable deposits at their nominal value, with guaranteed redemption at call
Features setting stablecoins apart from bank deposits are of two distinct types
- efficiency of transactions : speed and negligible cost compared to the pricing of credit and debit cards or of bank transfers, including (importantly) international transfers
- "anonymous" payments, equivalent to cash, are 'pseudonymous', traceable through patterns because all transactions are recorded on a public blockchain
New kid on the block
If stablecoins take flight in the US, with an Amazon-card or a Walmart-card at the forefront, and under the bold assumption that financial risk is 100% contained, it seems hard to argue that established financial institutions will not be impacted
- a share of 'free' cash deposited in the banking system will migrate to coin issuers who will invest in safe assets (US Treasuries) for their own benefit, earning interest of their holdings
- regulated credit and debit cards issuers (banks) will be hard pressed to compete against more loosely regulated stablecoins
- the "bitcoin ecosystem" will lose its special advantage as 'pseudonymous' transfer rail for illegal (usually criminal) international transactions
Overall, there is little doubt that the payment services provided by stablecoins will partially displace institutional actors, or at least impact their profitability
Yardstick of financial risk exposure
One important rider in making the case for stablecoins is effectively the assumption regarding 100% containment of financial risk
The security of transactions guaranteed by the banking system can be traced back to tight regulations of consumer protection (know-your-customer KYC rules), anti-money laundering controls (AML) and the like
Lighter touch (or no touch at all) regulations of stablecoins is bound to lower the cost for the issuers, but may potentially increase the level of uncertainty for the users
- The number of stablecoin issuers could grow exponentially into the hundreds if consumer-adoption rates create attractive opportunities, creating a regulatory nightmare
- Control over the liquidity of assets backing the stablecoin issuance is a challenge on its own, even for a single issuer if the collapse of Silicon Valley bank following mark-to-market losses on its Treasury portfolio, is any guide
- Reputational risk of the entire stablecoin family would surely be exposed by the troubles of just one issuer, even for the smallest fraction of 1% of its assets
Let a thousand flowers bloom (or not ?)
Cautious experimentation might be warranted and pre-emptive strikes by the banking behemoths will not surprise anyone
...a JP Morgan stablecoin in a 'mature' stablecoin environment ...
If risk is effectively contained by a small band of very large issuers, transactions may hardly be as 'revolutionary' as crypto enthusiasts advertise
What is more, the hope to extend the reach of the US dollar into the day-to-day transactions of international consumers may not be what it seems
A hearty welcome by non-US central banks is improbable because not one of these institutions will let go of a figment of their control over monetary policy
What the US dollar initiative will contribute to do is to bring a degree of urgency to implementation of the digital euro, the digital swiss franc or the digital yen, allowing payment settlements in seconds
....not to ignore the largest digital experiment of all, the Aadhaar payment system implemented in India launched 10 years ago - registering 1.4 billion distinct IDs as of April 2025 - and promoted by the Indian government in emerging markets
Stirring a hornet's nest
Internationally, the US stablecoins seem destined to be one option amongst digital alternatives, attractive in the (very large) criminal underworld - an embarassment in its own right
However, it is within the US financial system that the purported digital 'revolution' might deflate soonest
- the largest financial institutions will offer branded digital alternatives, alleviating the reputational risk of smaller issuers
- growth of stablecoins outside the banking system might be stymied by the very banks holding the safe Treasuries on behalf of crypto issuers - and exposed to demands of billions of dollars for overnight liquidity (in case of a run) - which was the reason given by the large European banks to reject such deposits
- in practice, operational complexity of issuance and book keeping, risk control, cyber attacks and liquidity guarantees might become an unsurmontable stumbling block for crypto 'technologists' - the banking operators surely expects as much
Dan Davies, a former regulatory economist at the Bank of England, observed that stablecoins are not so much breaking the financial system as integral part of the system, relying on the financial institutions they aim to revolutionize...
More to come...?