Are stablecoins really “acting almost like poker chips?”

27 Sep, 2021
Are stablecoins really “acting almost like poker chips?”

Stablecoins are having a moment, thanks to the U.S. Securities and Exchange Commission chairman.

In an interview this week with a Washington Post columnist, SEC Chairman Gary Gensler said the coins, which usually receive minimal attention in the mainstream media, are “acting almost like poker chips at the casino right now.”  He went on to say, "We've got a lot of casinos here in the Wild West and the poker chip is these stablecoins … at the casino gaming tables."

It’s interesting that stablecoins, which live under the shadow of Bitcoin, Ether, Dogecoin, Cardano, and other high-profile cryptocurrencies, could be the first digital coins to come under regulation by the U.S. government.  That could be due to the nature of these workhorse coins, which operate much like fiat currencies in some ways, representing a bigger threat to traditional financial monetary systems.

What makes stablecoins unique?  It’s the way their value is supported.  Stablecoins are backed in three different ways.  First, a coin’s value could be tied or “pegged” to a fiat currency such as the U.S. dollar, or by a commodity such as gold. (Sounds a lot like government-backed currencies, doesn’t it?)  Second, a stablecoin’s value could be collateralized with other cryptocurrencies.  And third, coins can be non-collateralized and use an algorithm to control the supply of coins in circulation, which keeps the coin value stable. It’s a process similar to what central banks use to maintain fiat currency value.

“Stablecoins seek to provide the best of both worlds: the stability of a traditional government-backed currency as well as the privacy and convenience offered by crypto transactions,” ABC News explains.  “They are often marketed towards investors who may not have the stomach for the volatility associated with Bitcoin, Ethereum and other popular cryptos -- which have been known to see-saw widely in value on a day-to-day basis.”

Stablecoins represent just about 7% of the crypto market, and hold a market capitalization of about $127 billion, according to CoinMarketCap. So, why are they in the hot seat?

The similarities of stablecoins to fiat currencies is where the threat lies.

In July, the U.S. Secretary of the Treasury Janet L. Yellen announced her intention to convene a committee to “discuss interagency work on stablecoins.”

“Bringing together regulators will enable us to assess the potential benefits of stablecoins while mitigating risks they could pose to users, markets, or the financial system,” she said. “In light of the rapid growth in digital assets, it is important for the agencies to collaborate on the regulation of this sector and the development of any recommendations for new authorities.”

Officials are said to be “paying special attention to how stablecoin transactions are processed and settled, and whether that changes based on market conditions,” Bloomberg reported early in September. “Officials are also worried about how to manage the growth of tokens that are sponsored by tech giants like Facebook Inc., according to the people. An association that includes Facebook has previously announced plans to develop a stablecoin called Diem.”

Right now, stablecoins are used primarily on cryptocurrency exchanges to purchase other digital coins. But that could change, as if Facebook does launch its Diem token, it could introduce stablecoins to its nearly 3 billion users around the globe, opening the door for the digital coins to be used to purchase goods and services.

“There are some benefits to consumers that are worth exploring; namely, facilitation of faster payments,” FDIC Chair Jelena McWilliams said in a Politico interview. “But there are also risks if stablecoins are adopted more broadly.”

In the meantime, traditional banking institutions are protecting their flanks by exploring Central Bank Digital Currencies (CBDCs).  The head of one of the world’s largest financial institutions, HSBC Bank, pointed out the value of CBDCs over crypto.  “These are legal tender backed by a central bank or government authority, which means they are transparent and stable – avoiding many of the risks associated with some other forms of digital money, particularly cryptocurrencies and some stablecoins,” HSBC Group CEO Noel Quinn said.

The bank chief noted that stablecoins, like all cryptocurrencies, is private money, which he said is “nothing new.”  SEC Chairman Gensler agrees, pointing to the “Wildcat” banks of the mid-1800s in the U.S., which were free from federal regulations.

Comprehensive regulation may be coming soon for crypto in the U.S., and it may start with stablecoins.  Are they really acting “almost like poker chips,” and how will the feds reign them in?  Will U.S. regulation be the catalyst for even more crypto regulation around the world?  Yellen’s committee report is expected to be released soon, and may provide the answers that traders want to know.

Joyce Pavia Hanson