The following is an opinion commentary from the Head of Financial Products and Regulatory Affairs at a leading cryptocurrency organization.
Drafts of the Stablecoin Act are circulating that would effectively prohibit Tether and other non-U.S. stablecoin issuers from participating in the U.S. market due to their offshore operations.
This proposed approach represents a major policy misstep.
A strong global reserve currency flourishes by expanding into international markets rather than retracting into its domestic sphere.
Forcing all USD-denominated stablecoins to relocate deposits to U.S. banks overlooks a fundamental monetary principle known as “Triffin’s dilemma.” This dilemma explains that exporting currency abroad boosts international demand, but it also risks domestic inflation if an excessive amount of that currency returns.
While bringing innovation back home is sound economic policy, reshoring USD is more closely tied to monetary policy, which is generally unfavorable for the country.
In reality, stablecoin innovation presents a chance to export additional USD internationally, thereby enhancing the strength and liquidity of the USD as a global reserve currency.
But why can’t this be achieved through U.S.-based issuers alone?
The Demand for Non-U.S. Issued Stablecoins
It’s evident that USDT is the preferred global stablecoin across non-U.S. markets, ranging from Asia to Africa and Latin America. This preference persists despite strong efforts from the second-largest competitor, Circle, to establish a foothold in these markets.
During my research into stablecoins and wallets, I observed that stablecoins backed by U.S. banks are frequently regarded as an extension of the U.S. government, while their non-U.S. counterparts are perceived as more independent. This reflects prevailing sentiments in the market.
Many users choose stablecoins due to their governments’ questionable monetary and banking practices, coupled with fears of potential governmental exploitation. They desire access to USD without the risk associated with U.S. banking.
Such anxieties are only intensified by significant events, including the perceived over-reliance on sanctions and more routine challenges related to the freezing of funds in international transactions.
Stablecoins provide a level of reassurance that users’ funds will remain secure, and market data clearly indicates a strong preference for non-U.S. issuers over those based in the U.S. This trend was evident even prior to Tether commencing audits of their reserves.
Tether likely understands that shifting their operations entirely to U.S. banks could alienate a substantial user base, creating openings for other players to satisfy that distinct demand.
Understanding the Meaning of “Ban”
A few different drafts bear the potential to impose various types of restrictions.
First, a stablecoin that isn’t registered in the U.S. could be barred from issuing it within the U.S. This is justified; a stablecoin issued in the U.S. should undoubtedly adhere to U.S. regulations!
A second prohibition could encompass the “use” of an unregistered stablecoin, extending from acceptance by payment processors to trading on exchanges to person-to-person transactions. Such a ban restricts market freedom, imposes negative effects internationally, and may even prove difficult to enforce.
A third variant of prohibition would exclude participation in any financial services with U.S. entities. Non-compliance here would mean U.S. financial institutions would need to sever all ties, including purchasing U.S. treasury bonds. For Tether, this could result in divesting over $100 billion in U.S. treasury holdings.
The Consequences of Any Ban
- Decreased USD Liquidity Globally: Trading bans would lower stablecoin liquidity against the dollar, increasing transaction costs for users and diminishing worldwide demand for USD.
- Inflation Threats: reducing holdings of USD at foreign banks risks exacerbating inflation domestically.
- Geopolitical Challenges: foreign adversaries might seize the opportunity to create USD-backed stablecoins using non-USD assets.
The Impact of Shifting Foreign Bank USD Reserves
If compelled to transfer reserves to U.S. institutions, Tether would funnel substantial amounts of USD back to the U.S., which could worsen domestic inflation. Meanwhile, international interest in offshore USD tokens would remain, encouraging competitors to rush in and fill the gap left by Tether.
When USD is pulled back from global circulation into domestic banks, it raises the lending capacity of U.S. banks, potentially leading to inflation.
This move also diminishes the USD reserves of foreign banks, which are vital for maintaining international USD liquidity and supporting global trade. It also attracts more buyers for U.S. treasuries, as those banks invest their deposits in safe offerings.
Beyond Tether, other issuers might fill particular niches in the USD market. For instance, countries like Cambodia have economies that are “dollarized,” where their local currency exists, but transactions are predominantly in USD, mainly in cash.
If a company or bank in such a region aimed to digitize the dollar to boost USD acceptance, stablecoin innovations would serve as an effective vehicle. Although these stablecoins might not comply with U.S. or EU regulatory standards, it would still be beneficial for the U.S. to support their existence, as it would bolster foreign bank USD reserves.
Geopolitical Risks of Displacing the USD
As observed by Tether and other stablecoin ventures, the demand for non-U.S.-issued stablecoins is substantial.
Imposing restrictions on non-U.S. issuers could lend a hand to foreign adversaries intending to replace the U.S. dollar by offering USD-pegged tokens that are backed by foreign currencies, gold, or alternative assets.
Such a shift could significantly reduce USD demand while simultaneously displacing USD supply, potentially weakening the value of the U.S. dollar considerably.
China is already taking steps to craft financial solutions that compete with the U.S. dollar, as evidenced by recent agreements with the Saudi government for a $100 billion USD-denominated bond backed by the Chinese Yuan (RMB).
Given the chance, China could roll out a USD-denominated stablecoin backed by gold or RMB, fully under their control. Other nations might also exploit this opportunity.
U.S. strategies should actively promote greater USD holdings in foreign bank reserves to fortify the dollar’s standing on a global scale.
A More Effective Approach
Modifying the Stablecoin Act to include exemptions for foreign-issued stablecoins could prevent these pitfalls.
Permit these stablecoins to function, trade, and be used within the U.S., while clearly categorizing them as unregistered, higher-risk options compared to fully regulated U.S. equivalents. Support U.S.-regulated stablecoins with benefits that reflect their reduced risk.
Such exemptions could:
- Foster global innovation to meet offshore demand for USD.
- Increase USD’s international usage without triggering inflationary pressures domestically.
- Sustain market competition, allowing consumers to make choices based on transparent risk disclosures.
This could be realized by either explicitly excluding foreign-issued stablecoins from the “payment stablecoin” definition or instituting a streamlined registration process that merely requires disclosures rather than the higher standards (or benefits) associated with U.S.-approved stablecoins.
By allowing a regulated coexistence rather than outright banning stablecoins like Tether, the U.S. could strategically reinforce the dollar’s global position, mitigate inflation risks, and advocate for continued financial technology innovation on a worldwide scale.
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