Cryptocurrency is an active ingredient pretending to be a payment instrument. The Congress has not seen through this illusion and has created a dangerous escape in the law newly adopted by the stablescoin, the guidance and the establishment of national innovation for the American stable law, or “Genius Act”. The law is based on a simple compromise: stablecoins are exempt from banking and in exchange are prohibited to offer interest on their documents. The ink of the law is not dry and crypto companies have already found an escape, calling for “rewards” interests. If we do not close this gap, this could cause massive problems resulting in losses by retail crypto holders, a bailout of Big Crypto or a financial crisis.
Bitcoin has started with dreams of being a global currency but has become an asset and, for many, a profitable investment (so far). One of the reasons why Bitcoin works so badly for payments is its oscillations in value. Enter the stablecoins, generally set to the dollar, eliminating this problem. However, Stablecoins are mainly used to buy and sell other crypto, not for ordinary transactions. While about one in seven American declares to have a crypto, one out of 50 American used any form of crypto, including stablecoins, to buy something other than crypto in 2022.
So if stablecoins are not used for payments, why do people have them? For many, this is the same reason they keep money in banks: to earn interest. The new law prohibits interest, but what happens if someone called interest a different name? Would that also pay?
Coinbase, the largest exchange of American crypto, proudly markets 4.1% of “awards” for the detention of the USDC, the largest stablecoin emitted American. Crypto.com offers variable rewards based on market conditions, while highlighting its latest partnership with Trump Media Group on their crypto. Its competitor Kraken offers even more: 5.5% of awards. Notice Kraken Marketing An annual percentage performance notation (APY) to look like an interest. That’s what it is.
Technically, the new law only prevents stablecoin issuers like Circle, which emits a USDC, from providing interest. Coinbase, Crypto.com and Kraken do not emit these pieces, they simply hold the parts of their customers. Imagine if E-Trade or Merrill Lynch offered customers money to allow them to “hold” their actions, and you will see the parallel.
The economy of this gap is problematic. Crypto’s exchanges generate profits to pay “rewards” to people who deposit crypto thanks to a combination of payments from stablescoin holders and potentially using deposit funds to make their own investments. The more the award customers are paid, the more investments generating this money. Banks do it with your deposits, but with close limitations, constant surveillance and federal dispatch insurance which fully covers 99% of depositors. Crypto’s exchanges have none of these railings, as FTX demonstrated when it took customer assets to speculate and collapse.
During good times, crypto exchanges earn a lot of money and can offer higher interest rates than banks that legitimately cry against this escape. In the extreme, if people left the banking system to pursue higher interests in the stablescoins, up to 6 billions of dollars in deposits could leave the banking system, according to the Treasury department. A series of bank deposits on this scale would land the economy, because banks need deposits to make loans.
Ironically, the labeling of cashback’s “rewards” rather than interest is something that banks have been launched by credit cards. Credit cards expressed a “reward” as opposed to interest is an escape from banks that operate because credit cards users do not pay taxes on discounts, but depositors make interest. Encouraging expenses and tax economies is poor government policy, but this escape has gained ground, as evidenced by lobbying around the fear of “removing my points” regulations.
If offering an apparently stable investment to consumers while taking risks with their money seems familiar, then perhaps you have a common investment fund (MMF). The MMFs took advantage of a district escape so that as long as their value remains greater than 99.5 cents, they seem to be stable to a dollar (or even increasing the value).
The creation of MMFs has withdrawn money from the banking system, finally playing a major role in the 1980s savings and loans crisis. The MMF industry increased by almost 1,900% in three years between 1978 and 1981, demonstrating the speed with which these gaps can develop. The MMFs helped create a new loan system thanks to assets such as commercial paper, which played a massive role in the 2008 financial crisis when the reserve fund, one of the first mmfs, “broke the male” when its lehman brothers commercial paper assets imploded during the 2008 financial crisis.
Taxpayers have bail out the common funds for the monetary market, essentially guaranteeing their value in the 2008 financial crisis. I helped write the supply of the law designed to stop this bailout, but it was quickly ignored and the MMFs were again bailiff during Pandemi-19 COVID-19 in 2020. Today, 7 billions of dollars are seated in the mmfs and with two rescuers, investors may assume that their money is assured.
As a testimony to the Congress, the former president of the Commodity Futures Trading Commission (CFTC), Tim Massad, warned that allowing interest in the stablescoins “could lead to the creation of financial products similar to monetary market funds (mutuals)”. But lobbying on the StableCoin bill was intense and the legislation was promulgated with this gap.
The best way to fill this gap would be for Congress to extend the provision against interest in anyone who uses stablecoins as guarantee, which would include cryptography exchanges. That the stablecoins are the payment instrument they say that they are. America’s payment system is terrible for workers, and decades of regulation by the federal reserve were a failure for everyone, except banks and credit cooperatives that have benefited from the overdraft.
If the congress does not act, the regulators could work to fill the escape themselves. The CFTC and the Securities and Exchange Commission (SEC) could examine what Crypto-Lammel exchanges and wallets are with their stable customers and issuing appropriate rules and public declarations. At the very least, people should know that their stablecoins can be in danger if people hold them reinvest them. At most, these regulators should envisage rules preventing the exchanges of cryptography to take too many risks.
Finally, it should be specifically specified that no one will be bailout if the crypto implodes. This can start with clear declarations of senior officials and a legal restriction on the rescue authorities for the crypto. Trump’s personal participation in his growing crypto-empire complicates all of this, creating a strong incentive for him to want to keep government bailout on the table. You can see why financial regulatory experts and questionable upgrading veterans are crying on a fire at five alarms.
If the stablecoins can become the payment instrument they want to be, it could greatly contribute to making the American payment system faster, more equitable and working better for millions of people who pay billions to access and move their own money. I will first be online to encourage this result. But I fear that the system implemented has all the ingredients so that many people earn money as the crypto increases in value and leaves the taxpayer and the little guy holding the bag if the crypto-bubble bubble.
