What do you know? Congress is stepping up to do at least one job. The Senate this week passed a bill, 68-30, to establish a regulatory framework for crypto stablecoins. With one big caveat, this is a good development.
Stablecoins are a form of digital currency pegged to another fiat currency or asset like gold and are designed to hold a constant value. If you buy $1 of a stablecoin, you are supposed to be able to redeem it for $1 in hard currency. They are also supposed to be backed by safe and liquid assets like Treasurys and bank deposits similar to government money-market funds.
Stablecoins reduce friction in payments and money transfers since settlements can clear within seconds versus hours or sometimes days with the traditional banking system. This can reduce risk from exchange-rate volatility for foreign counterparties. They also have lower transaction fees than credit cards, wire transfers and other payment networks.
There's the biggest concern. The Senate legislation says stablecoins “shall not be backed by the full faith and credit of the United States“ or subject to deposit insurance. But the FDIC insures bank deposits, and putting it in charge of regulating stablecoins may create the impression of an implicit government backstop.
Broader adoption of stablecoins will create new financial risks that will have to be closely monitored, but the legislation at least establishes safeguards to protect users. It also subjects issuers to anti-money laundering laws, which could help law enforcement crack down on cartels that move money with stablecoins.