• Stablecoins are blockchain-based tokens that are pegged to a fiat currency or other “stable” asset.
• Brendan Malone, a former Federal Reserve Board analyst, argues that stablecoins may be less risky to hold than traditional bank deposits due to their strict reserve management.
• Last night, the House Financial Services Committee advanced the Clarity for Payment Stablecoins Act of 2023 to the House floor.
What are Stablecoins?
Stablecoins are blockchain-based tokens that are value-pegged to a fiat currency or other “stable” asset – most frequently the U.S. dollar. They allow users to benefit from the efficiency of blockchain transfers and services under certain circumstances, while not being exposed to the infamous volatility of common cryptos like Bitcoin (BTC) and Ether (ETH). The two largest stablecoins by market cap today are Tether’s USDT and Circle’s USD Coin (USDC), cumulatively representing over $100 billion in value.
Less Risk Than Traditional Bank Deposits?
Brendan Malone – a former Federal Reserve Board analyst – argued on Wednesday that stablecoins may actually be less risky to hold than traditional bank deposits due to issuers managing their reserves strictly. These reserves might match the stablecoins outstanding one-to-one, consist of central bank liabilities or short-dated Treasuries, and be protected from creditor process with assessments or audits. In contrast, banking can be “highly risky” as banks often use customer deposits to invest in longer duration assets which can lead to runs on deposits if values drop substantially in between withdrawals requests and deposits made; an example being Silicon Valley Bank (SVB) which collapsed in March after selling its long-duration bonds at a $1.8 billion net loss prompting depositors to rush for exits even though Circle’s USDC also lost its peg when it had $3 billion of its reserves stored as bank deposit at SVB.
Risk Management Framework for Stablecoin Issuers
Malone added that risk management framework applicable should be designed specifically for stablecoin risks which are different from those arising from traditional banking methods so as not expose users holding them subjecting them additional risks when withdrawing funds they have deposited in such coins against what they expected when investing into those coins initially.
Clarity for Payment Stablecoins Act of 2023 Advances
The Clarity for Payment Stablecoin Act of 2023 was advanced by the House Financial Services Committee last night and will soon move onto the house floor where it is expected lawmakers will pass this act into law thus providing clarity over how payment companies using such coins should operate within legal boundaries set by both federal government as well as state governments which had been largely unclear up till now thus causing confusion among payment companies operating within this space until now making it difficult for them operate without fear of running afoul with either federal laws or state laws whichever were applicable depending upon respective jurisdictions these companies were based out off .
Conclusion
In conclusion ,dollar pegged stablecoins may actually be less risky than traditional bank deposits due their strict reserve management system plus recent advances made by house financial service committee passing Clarity For Payment Stablecoin Act Of 2023 means more clarity would soon become available about how payment companies should operate within legal boundaries set by both federal government as well as state governments thus helping reduce confusion created until now amongst such payment companies operating within this space .