The News: Consumers are winning as Congress looks set to approve non-bank stablecoins, as stablecoin legislation is making progress through Congress. Discussions indicate that well-regulated money services businesses will be able to compete with banks to issue stablecoins. Read the congressional coverage here.
Consumers Will Win as Congress Looks Set to Approve Non-Bank Stablecoins
Analyst Take: As Congress looks set to approve non-bank stablecoins, it’s an eagerly awaited, much-needed acknowledgment from Congress that you don’t have to be a bank to be safe.
This is not in any way a knock on bank-issued stablecoins. The significant regulatory restrictions on bank activities and holdings that ensure their safety and soundness are valuable and bank-issued stablecoins absolutely have a place in the financial ecosystem.
But for that same reason – significant regulatory restrictions – banking services aren’t available to everyone, and that’s a problem important to address. A whopping 63 million Americans are underbanked or unbanked entirely, an effect felt disproportionately higher by Blacks and Hispanics.
That’s why we see this move by Congress on this issue as key. With proper legislation, money services businesses and other well-regulated institutions can extend critical financial services beyond what banks alone can provide.
Stablecoin Issuers Don’t Need Banking Licenses to be Sound
Now, let’s talk stablecoins. Stablecoin issuers don’t need a banking license to be sound. What they do, however need, is the ability to guarantee that every $1 stablecoin can always be promptly redeemed for $1 USD. That means that the issuer must back the stablecoins with high-quality liquid assets — cash and short-duration US Treasuries. Transparency is critical here, and consumers need full and regular visibility so they can verify themselves.
It’s also important that those reserve assets backing the stablecoin are bankrupt remote. And in the event of issuer bankruptcy, stablecoin holders must be able to promptly redeem the tokens for dollars.
Issuers must have proper controls and risk management in place, ensuring that they don’t take unnecessary risks and that they are protecting customers against fraud. These controls should be regularly tested by third parties, with results publicly posted.
And all of the above? None of these safeguards or guarantees require banking licenses. It requires good legislation and good actors.
Consumers Win When Well-Regulated Institutions Compete
For consumers, competition, especially when well-regulated, is a good thing. Look no further than the revolution in payments to see the overwhelmingly positive impact that competition among well-regulated institutions can have for small businesses and consumers alike.
Consumer choice is core to the American dream, and our rich history is filled with stories of entrepreneurs who thought up a new business concept and took a leap of faith and launched it. Winners in this arena are chosen not by fiat, but by consumers voting with their wallets. That said, it was only just a few years ago that it wasn’t so easy for entrepreneurs and small businesses learning to compete online with a digital storefront or on eBay. The challenge wasn’t the web or the digital storefront services, it was payments. You can’t build a business if you can’t get paid.
Salvation didn’t come from the banks. It came from new, innovative money services businesses like PayPal and Square, who made accepting payments online for a small fee incredibly easy. Easy for merchants and equally easy for consumers. In fact, these money services offerings unlocked and revitalized a cornerstone of the American dream for millions of small businesses with trusted, safe, cost-competitive online payments.
This has been an almost incomprehensibly powerful economic engine that has played a central role in lifting up the living standards for the entire country, especially those who come from less privileged backgrounds.
The mark of a wildly successful revolution is that it becomes so pervasive we forget what life was like without it. Booking travel without talking to a travel agent, phones with apps that can stream video on the go, and quick and easy Venmo payments that take the credit card dance business out of an evening out with friends.
The Stablecoin Industry is Poised for Just Such a Revolution
The stablecoin industry is poised for the same thing — the same kind of a revolution. We are on the precipice of unlocking a small business and consumer revolution. But it’s not guaranteed yet.
Entrenched banking interests are lobbying for Congress to step in and prohibit any business except banks from issuing stablecoins. They are, of course, protecting their own interests rather than focusing on what’s best for consumers.
Imagine if the same had been done with payments in 1998, the year PayPal was founded. We’d likely still be dealing with the inconvenience of mailing checks for our purchases. More importantly, small businesses and those cut off from the banking sector would have been left behind. Payments both revolutionized and democratized the purchase/compensation process and left us collectively in a better place.
And that can happen today, in a different way, with stablecoins. Outside the banking regulatory perimeter, well-regulated nonbank stablecoin issuers can make financial services available to those left behind by banking without sacrificing soundness. It’s a revolution that will be no less dramatic than the one we’re already living as it relates to payments and it’s not at all impossible to accomplish.
What we know to true is that you don’t have to be a bank to be stable. We are glad that Congress is listening and when non-bank stablecoins are approved, consumers will be the winners.
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The original version of this article was first published on Futurum Research.
Jared is an Analyst in Residence at Futurum Research, where he helps guide our practice in all things Web3, the Metaverse, and cryptocurrencies so as to help business leaders understand how they work, why they matter, and how they can not only get involved, but become market leaders along the way.
Jared previously co-founded and served as President and Board Member of Triple Point Liquidity, a blockchain-based fintech startup serving alternative asset managers, their investors, and fund administrators. Prior to Triple Point, he held multiple roles at IBM including leading Digital Assets at IBM Blockchain, leading corporate development for Industry Platforms, and founding Watson Risk & Compliance.
Jared is author and podcast co-host at Fat Tailed Thoughts and serves as a trustee for The Williams School.
Jared holds an AB from Dartmouth College.