The Latest Crypto Showdown
America’s banks are fighting a losing rear-guard action to stop stablecoin holders from collecting interest
This week promises renewed fighting between Russia and Ukraine as the cold-weather ceasefire ends, a showdown between the gritty New England Patriots and the dominant Seattle Seahawks and the latest regulatory battle between the stablecoin innovators and the old-fashioned banks.
I’ll be rooting against Russia, Seattle and the banks.
In this latest chapter of the crypto revolution, Coinbase CEO Brian Armstrong has been leading the charge to allow stablecoin holders to collect interest on their holdings. Meanwhile, America’s bankers warn that traditional deposits will gush into these new-fangled digital tokens, undermining the country’s financial system. After some testy exchanges at Davos between Armstrong and America’s banking titans, the battle resumes at the White House today as the Trump administration attempts to broker a compromise.
The issues are complicated, but when the entrenched interests warn that an innovation may be too attractive for their customers to resist, they are fighting a losing battle.
Let’s stipulate that there’s a lot to worry about in crypto land. From the fraud that brought down FTX chief Sam Bankman-Fried to the opaque deals involving the Trump family’s World Liberty Financial, “decentralized finance” is developing much faster than regulators can craft sensible rules.
Still, the broad promise of money that moves like an email and settles like cash in the vault is too compelling to derail. And that’s without even considering the possibilities from smart contracts or tokenized securities. Multinational firms hope stablecoin will make internal payments easier to manage, while the digital ledgers that move these tokens should open valuable financial services to the poor or unbanked.
For now, dollar stablecoins, which are crypto tokens backed by dollars and treasuries, are leading the revolution’s next stage. Beyond the efficiency gains, the interest generated by the assets backing the stablecoins makes this an extremely attractive business. Stablecoin transactions grew 72% last year to $33 trillion. While most of those volumes involved speculation in unbacked cryptocurrencies, the real-world applications of cheap and secure payments are coming into view. Companies from Walmart to Fidelity to Visa are angling for a piece of the action.
For now, the dollar stablecoin business has been dominated by Tether, which claims headquarters in El Salvador, and Circle, based in New York. Under the Genius Act, passed last July, issuers like these face strict reporting and auditing requirements and are prohibited from paying interest on their coins. Ostensibly, this is meant to protect banks that now pay little or nothing on checking accounts. But that law is silent on firms that distribute stablecoins, and the Clarity Act, which is now making its way through Congress, is meant to provide, yes, clarity.
Coinbase, which has a stake in Circle, takes a share of the immense revenue earned on the stablecoin collateral to offer “rewards” to its preferred customers. Banks, which have been happy to explore issuance of their own stablecoins, don’t want this upstart industry to undermine their core business of offering deposits. “If you want to be a bank, just be a bank,” Bank of America’s CEO Brian Moynihan told Armstrong in Davos. “If you want to be a money-market fund, just be a money-market fund.”
But stablecoins aren’t really either. Unlike banks, their business model doesn’t depend on leverage, which requires tighter regulation. Unlike money market funds, they offer cheap, easy payment solutions. If banks worry about losing deposits, they should pay higher interest on deposits or offer faster payment services. If stablecoin holders cannot collect something that looks like yield, this creative new industry will surely find ways to offer points or miles that will be much harder to regulate.
The issues are complicated, but when the entrenched interests warn that an innovation may be too attractive for their customers to resist, they are fighting a losing battle.
That’s not to say that stablecoins don’t need tight regulation. In fact, the real challenge will come from what will surely be a proliferation of dollar stablecoin issuers abroad. Tether’s coin is already popular in countries like Turkey, Venezuela and Argentina, where the full faith and credit of the governments leaves something to be desired.
U.S. regulators will have to find ways to work with their counterparts to ensure that whatever someone calls a “dollar stablecoin” is not only properly collateralized but also respects Washington’s latest sanctions. This would be a challenge in the best of times, but looks much trickier when even traditional European allies worry the Trump administration’s crypto ambitions will undermine control over their euros, crowns and sterling.
But this week’s battles call for supporting the underdogs. A crypto industry that can stump up $238 million for President Trump’s election campaign may not seem as much of a righteous cause as Ukrainians battling to defend their land or 23-year-old Drake Maye leading the Patriots into the toughest game of their season. Still, if America’s banks can’t keep up with the technological revolution at hand, then we need new bankers.
Really well-articulated case. The line about banks fighting a losing battle when they argue innovation is "too attractive" nails the issue, that's basically admiting they can't compete. If stablecoins can offer better servics faster payments plus yield then forcing them into outdated categories misses the point.