San Francisco-based crypto investment firm Paradigm recently published a paper discussing the future of stablecoins in the payment system. Authored by Policy Manager Brendan Malone, the paper argues against applying traditional banking and securities frameworks to stablecoins, emphasizing their unique characteristics and use cases.
The paper begins by acknowledging that while recent U.S. Congressional proposals have allowed for stablecoin issuance beyond banks, the ongoing policy discussions often lean towards traditional safety and soundness principles found in bank supervision and regulation. Malone argues that these traditional frameworks are not suitable for stablecoins. Instead, he advocates for a regulatory environment that promotes openness and competition, allowing stablecoins to function and thrive.
Malone describes stablecoins as digital dollars issued on public, permissionless blockchains. He highlights three key features that make stablecoins advantageous for the digital payments ecosystem:
- Reliable, Shared Infrastructure: Public blockchains offer open access and high uptime, requiring minimal upfront capital expenditure for payments and tokenization.
- Programmability: Smart contracts enable complex code to be transparently executed according to user-defined conditions.
- Composability: Applications and protocols on public blockchains can be combined and used interoperably, creating new functionalities.
The paper distinguishes stablecoins from bank deposits and money market funds (MMFs) in terms of risk. Unlike banks, which engage in maturity transformation, stablecoin issuers can hold reserves that match the stablecoins outstanding one-to-one. These reserves can consist of central bank liabilities or short-dated Treasuries and are protected from creditor processes. Malone suggests that federal regulation could require such safeguards, eliminating the duration mismatch between short-term liabilities and long-term or risky assets.
Malone also addresses the misconception that stablecoins resemble MMFs. He argues that stablecoins serve different purposes, primarily acting as a means to facilitate U.S. dollar transactions in the crypto space rather than as investment options or cash management vehicles.
Malone urges the U.S. Congress to act promptly and outlines three key principles for stablecoin legislation:
- Protecting Users: Legislation should set reasonable risk-management requirements for centralized stablecoin providers.
- Prioritizing Competition: A viable pathway should be ensured for nonbank issuers at both federal and state levels.
- Promoting Innovation: Legislation should allow stablecoins to take various forms, provided they meet baseline consumer protections and manage risks appropriately.
By focusing on these principles, Malone believes that legislation can address key concerns while allowing stablecoins to function effectively and innovate.