The Competitive Enterprise Institute (CEI), a non-profit DC think tank that advocates on behalf of free markets, has published a paper on stablecoins as well as central bank digital currencies. While CBDCs are state-managed digital currencies, perhaps utilizing blockchain technology, stablecoins are issued and managed by private firms. Today. the largest stablecoin by valuation is Tether (USDT), a dollar-based crypto, that is valued at $66 billion. Tether is followed by USD Coin (USDC), managed by Circle, with a valuation of over $54 billion.
Stablecoins have emerged as a vital variable in the crypto ecosystem as they enable investors/traders to move quickly into fiat-based, thus stable, digital currencies. Stablecoins tend to provide a low-cost, low-friction method of moving value, and many industry insiders see great potential for transactions beyond crypto. Yet stablecoins are regulated in a fragmented manner, and most jurisdictions are moving to create or incorporate more oversight – if they allow stablecoins to profligate.
A Market Approach to Regulating Stablecoins, the Future’s Money, authored by CEI adjunct fellow Paul Jossey, the paper claims that the “best, and perhaps only, way for the dollar to remain the world’s reserve currency,” is through privately issued stablecoins. While acknowledging the need for regulatory clarity, or a “few rules” and “boundaries”, Jossey believes that policymakers should take a “minimalist” approach when it comes to regulating stablecoins.The paper proposes a “three level, issuer-choice” path that aims to provide certainty for stablecoin issuers.
The paper states:
“There is broad agreement among policy makers that disclosure of reserves and redemption rights should inform any regulatory framework, although most proposals would go much further.”
“Disclosing redemption policies and reserve assets, without dictating content, allows the market to judge each issuer’s credibility and integrity. It also allows innovation to flourish, as stablecoin issuers are spared from a federal regulatory regime meant for traditional banks.”
The market approach, according to Jossey, is to consider one of three options:
- A federal money-transmission license with the disclosure requirements [outlined];
- A state-level money transmission system with its federal obligations that comprise the status qu
- A state or federal bank charter, the latter as proposed in the PWG report
Jossey shares that he borrows from Senator Toomey’s proposal for a federal special purpose bank charter and Coin Center Research Director Peter Van Valkenburgh’s federal money transmission license option. As for CBDCs, Jossey is not a fan, slamming the concept:
“A stablecoin ban and widespread CBDC adoption would produce a softer version of the dystopian nightmare China is implementing and others are considering.”
Obviously, the concern is that governments will go beyond a method of value transfer to one of monitoring, control and perhaps other Orwellian actions.
CI reached out to CEI for some additional insight. We asked if we should be looking at stablecoins simply as updated payments rail, similar to what credit (debit) cards accomplished many years ago, creating an easier way to make purchases.
Jossey said that stablecoins could be used as an updated payment rail, but that is only the beginning of their potential utility.
“They can be a way to maintain purchasing power for people living in profligate countries such as Argentina and Venezuela, they can provide a way to transact outside the strictures of authoritarian states like China, they can fuel an individual-centered Web3 internet, and they can maintain the dollar’s preeminent status by becoming the internet’s reserve currency.”
And what about the Federal Reserve’s apparent openness in a bifurcated path, where CBDCs are available to institutions, but stablecoins are mainly a consumer product? Jossey said that wholesale CBDCs would pose privacy, tracking, and monitoring concerns more than retail CBDCs. So this would be a more workable solution than retail CBDCs.
The Securities and Exchange Commission has indicated that stablecoins could be securities, ostensibly due to the makeup of reserves. Jossey said that the existence of reserves and their composition should be a matter of public record.
“Most stablecoin issuers already do this, and it helps provide confidence in the market. The actual composition of the reserves (ie their asset backing) should not be dictated by the government but left to individual companies and consumers who can view the compositions.”
Currently, the Office of the Comptroller of the Currency (OCC) is in the running to be the lead regulator as they regulate federal banks. Jossey believes dictating that stablecoin issuers become OCC chartered banks is a terrible policy. He believes this will “stifle competition, entrench established players, and shield the banking industry from competition. Although stablecoin issuer should have the choice to become chartered banks (federal or state).”
So will forthcoming regulation compell an industry shakeout? Jossey said yes, as in any industry, the existence of heavy regulation will entrench a few players at the top whilst stifling upstarts.
“The paper offers a solution to this problem through a federal license with a few simple requirements including publication of reserves and attestation and codification that stablecoins are not securities and the SEC has no jurisdiction over them.”
CI asked about the pending crypto legislation that aims to provide a regulatory regime for stablecoins. John Berlau, CEI Senior Fellow and Direcor of Finance Policy, jumped in and said:
“Based on what has been described in the press as the framework for the deal – the accuracy of which we can’t vouch for – CEI would be very much opposed. The legislation under consideration has been described as bank-centric with heavy, prescriptive regulation from the federal government. Paul Jossey’s excellent report makes the case why this is not the right approach for American competitiveness and consumer welfare and why a simple disclosure-based approach is a much better alternative.”
Anyone who is interested in the future of money or digital currency should read this paper. Stablecoins may be here to stay. It’s just how the federal government allows them to operate and perhaps thrive.