Stablecoin going mainstream with new law
On July 18th the President signed the GENIUS Act into law. This new law, whose acronym stands for "Guiding and Establishing National Innovation for U.S. Stablecoins Act," specifically addresses and provides regulation for a type of cryptocurrency commonly referred to as stablecoins.
While the impacts of this emerging stablecoin monetary technology are limited and early, the passage of this law signifies an important evolution regarding cryptocurrency, and in my opinion marks a maturation of blockchain-based financial products as it opens the door for these technologies to be more widely integrated into the traditional financial system. Let's take a look at this new development.
First, what is a stablecoin? As anyone who has invested in or simply paid attention to cryptocurrencies such as Bitcoin has experienced, one of the most prominent features of cryptocurrency is price volatility. The one-year price range for Bitcoin prices has varied by about 70%. Other high-profile cryptocurrencies have been even more volatile, which makes it particularly difficult to use cryptocurrency for real world financial transactions. This volatility has relegated cryptocurrencies to the realm of speculation and limited their utility as the "currency" inherent in their labeling.
An actual currency should ideally serve as a store of value, and as a medium of exchange. Holders of a currency like the U.S. dollar expect their dollars to maintain buying power and be readily accepted for acquisition of goods and services. When dollars lose value -- also known as inflation -- the effects can be very negative for the economy. Just think: when dollars erode in value by only 2% to 5% it shifts all kinds of consumer behavior as well as political inclinations. Imagine holding a currency with 70% swings. It just doesn't work.
Stablecoins are an attempt to solve this volatility challenge. As the name implies, a stablecoin is a digital asset (cryptocurrency) designed specifically for price stability. This objective is pursued by backing the digital currency with conventional "real world" assets such as U.S. dollars, U.S. Treasury securities or even commodities such as gold or oil. Usually, this backing comes in the form of a 1:1 "peg" to the underlying real-world asset which is to be held at a commercial bank or financial institution.
If this sounds complicated, it can be, which is a primary driver behind the new rules created in the GENIUS Act. In this new law the U.S. Federal Government has provided clear guidance and regulatory framework for assets being labeled or marketed as stablecoins.
Some of the regulatory provisions in the new law require stablecoin products to be fully backed (reserved) by official U.S. currency (dollars) or U.S. Treasury securities and to this effect require stablecoin issuers to provide monthly public disclosure about the assets they hold in reserve. In addition, the new law subjects stablecoins to banking regulations designed to address money laundering and compliance with U.S. sanctions regimes. In short, the government is requiring stablecoin-labeled cryptocurrency products to go "legit," with consumer protections and compliance with banking regulations.
So, what does all this mean to the typical investor or saver in America? Frankly, in my opinion, not much right now -- and at the same time perhaps a whole lot going forward. By embracing a fairly early adoption of this new currency technology, the United States government may be shoring up demand for U.S. dollars and U.S. Treasury securities into the future. If U.S. backed stablecoins become more integrated into banking and global trade, the demand for dollars as a modernized version of reserve currency could continue to rise. In addition, stablecoin issuers could be a new source of demand for U.S. Treasury securities, and the combination of strong stablecoin demand for U.S. dollars and U.S. Treasuries could have positive impacts on inflation and interest rates in the U.S. Due to their potential efficiency, I can imagine a scenario in which U.S. stablecoins become the preferred medium of exchange in international trade, which could secure the U.S. dollar's prominence in global trade for a generation.
Second, in my opinion, stablecoin technology effectively diversifies the control of the money supply currently vested in central banks, particularly the Federal Reserve. By providing the framework for tokenizing U.S. dollars, the GENIUS Act advances the potential issuance of new supplies of dollar-based currency products, a function which is now relegated to the Fed and the banking system. The effects of this possibility could be profound, and difficult to predict at this early stage.
As I speculate about the potential effects and outcomes of this new regulatory structure, I think one aspect is clear. Blockchain and cryptocurrency technology is growing in importance in our lives and economy. What was previously a quirky sideshow market seems to be going mainstream, and there will be lots to learn.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
