Stablecoins: What are They?

A little-known area of the growing cryptocurrency market is stablecoins. Stablecoins, a type of cryptocurrency, are not mined through an open network like Bitcoin and Ethereum.[1] Instead, stablecoins derive their value from another asset.[2] Most stablecoins are pegged to a national currency.[3] For example, the USD Coin is a stablecoin that is pegged to the U.S. dollar.[4] Therefore, one USD Coin is always worth one U.S. dollar.[5] By deriving their value from a national currency, stablecoins avoid the volatility that is usually associated with cryptocurrencies.[6] Like other cryptocurrencies, stablecoins are stored in digital wallets.[7]

While Treasury Secretary Janet Yellen has recognized the potential benefits of stablecoins such as “supporting beneficial payment options,” there are no regulations in place to monitor stablecoin reserves. [8] Government regulators are concerned about the implications of a relatively stable cryptocurrency that allows investors to avoid anti-money laundering (“AML”) regulations. [9] Recently, the President’s Working Group on Financial Markets (“PWG”), consisting of Treasury Secretary Janet Yellen, the chairpersons of the Board of Governors of the Federal Reserve, Securities and Exchange Commission, and Commodity Futures Trading Commission, issued a report recommending Congress to pass legislation to regulate the stablecoin market.[10]

The legislation recommended by the PWG report would limit the issuance of stablecoins to insured depository institutions and establish a federal framework to regulate other parties in stablecoin arrangements, such as the party that facilitates the transfer of stablecoins between individuals and the entity that stores the stablecoins.[11] While the PWG believes the proposed legislation should be passed urgently, it recommends in the meantime that agencies use their current authority to address the risks posed by the unregulated stablecoin market.[12] Moreover, the PWG recommends that international AML standards should be implemented to prevent the use of stablecoins by illicit actors.[13]

While stablecoins are still operating in an unregulated environment, one thing is clear: the market is only continuing to grow, and the SEC and other government agencies are taking notice of the unregulated area. Common sense, sound legal advice, and diligence will help any business or investor navigate this market despite the uncertainty surrounding stablecoins.

[1] Julian Dossett, Stablecoins: What they are, how they work and how to buy them, CNET (Dec. 6, 2021), https://www.cnet.com/personal-finance/crypto/stablecoins-what-they-are-how-they-work-and-how-to-buy-them/.

[2]Id.

[3] Kathryn G. Wellman; Neil T. Bloomfield, President’s working group report calls for stablecoin regulation, Reuters (Dec. 2, 2021), https://www.reuters.com/legal/transactional/presidents-working-group-report-calls-stablecoin-regulation-2021-12-02/.

[4] What is USD Coin? Coinbase, https://www.coinbase.com/usdc (last visited Dec. 28, 2021).

[5]Id.

[6] Wellman; Bloomfield, note 3.

[7] Dossett, note 1.

[8] Felicia Hou, Stablecoins are taking over the crypto world hot topic for Congress—here’s what they are and the fastest-rising ones to keep an eye on, Fortune (Dec. 8, 2021), https://fortune.com/2021/12/08/stablecoins-cryptocurrency-congress/ (quoting Janet Yellen.

[9] Wellman & Bloomfield, note 3.

[10] Id.

[11] President’s Working Grp. on Fin. Mkts., the Fed. Deposit Ins. Corp., & the Off. of the Comptroller of the Currency, Report on Stablecoins (Nov. 2021).

[12] Id.

[13] Id.