Last summer, President Donald Trump signed a piece of legislation into law involving stablecoins, a type of digital currency that’s designed to hold its value and not jump around like Bitcoin and other kinds of cryptocurrency. The law was meant to establish a framework for companies to start issuing stablecoins.
Right now, there’s a separate law making its way through Congress, called the CLARITY Act, meant to address some of the open questions about how these things are going to work, including how they’re going to be regulated, and whether stablecoins are going to siphon money away from the traditional banking system.
The reason why stablecoins are supposed to hold their value is because the companies issuing them back their coins with safe financial assets.
“In this case, mostly U.S. Treasury securities, and a few other types of related, very short-term assets,” said Todd Baker, a senior fellow with Columbia Business School.
Baker said when someone buys, say, $100 worth of stablecoins, the company issuing them will use the money to buy $100 worth of U.S. Treasurys, for instance. “And if you want that money back, you go back to the stablecoin issuer, and the stablecoin issuer sells some of those very safe assets, and it gives you cash.”
Currently, the companies that issue stablecoins are mostly tech companies. Most people use stablecoins to buy bitcoin and other cryptocurrencies, Baker added, since stablecoins can make those transactions easier. But stablecoins can also be used to make instant payments, as long as the person receiving the payment is willing to accept stablecoins.
In other words, stablecoins are similar to traditional bank accounts: People can use them to make payments, or they can let their money sit there. That’s why many banks are concerned about what will happen if stablecoins become more popular.
“Small banks, community banks, are right to be afraid,” said Hilary Allen, a law professor at American University.
The fear is that stablecoins will draw depositors’ cash away from banks, especially if stablecoins pay competitive interest rates.
Right now, stablecoin issuers aren’t allowed to pay interest, but Allen said there are loopholes.
“There are affiliated exchanges or partners with other crypto-industry infrastructure,” she said. “They can pay yield, which is effectively interest.”
The concern isn’t only about bank competition, she noted. It’s also about where that money will end up. Because the companies issuing stablecoins store that money in Treasurys and other safe assets.
“They’re not making loans to people for mortgages,” Allen said. “They’re not making loans to small businesses to get up and running.”
That said, some banks themselves have been getting into stablecoin, according to David Schiff, senior managing director with FTI Consulting.
“The larger banks, particularly those that have a global footprint and are working with very large commercial clients that have cross-border operations, are absolutely starting to experiment,” Schiff said.
That’s because those banks’ commercial clients are interested in the instant payment services that stablecoin technology can provide, he said. “It really is about helping to grease the skids of the payment system and make it easier for those institutions.”
But smaller banks have been more reluctant, Schiff cautioned. That’s partly because offering stablecoins would tie up money that they would otherwise lend.
In addition, banks don’t necessarily have the resources to offer stablecoins even if they wanted to.
“I can’t just set aside a few billion dollars of my earnings or my capital to go and build the infrastructure, the cybersecurity, the compliance, and all of the other components of launching such a product,” said Dominik Mjartan, CEO of American Pride Bank in Macon, Georgia.
Mjartan said he is worried about what will happen if stablecoins become more widespread.
“We bank some large insurance companies,” he said. “And they’re definitely talking about how they could possibly benefit from accessing some of these new exchanges, or new ways to store and move money.”
So instead, Mjartan said his bank is going to focus on doing what it does well. “We’re going to find ways to support our customers with faster services, with safer services, and we’re going to continue to pay very strong returns on their deposit accounts.”
Mjartan added that if his bank can keep doing that, he’ll at least have a shot at hanging on to his customers’ deposits if stablecoins start luring them away.