A Senate Stablecoin Breakthrough

 

“What do you know? Congress is stepping up to do at least one job. The Senate this week passed a bill, 68-30, to establish a regulatory framework for crypto stablecoins. With one big caveat, this is a good development.

 

Stablecoins are a form of digital currency pegged to another fiat currency or asset like gold and are designed to hold a constant value. If you buy $1 of a stablecoin, you are supposed to be able to redeem it for $1 in hard currency. They are also supposed to be backed by safe and liquid assets like Treasurys and bank deposits similar to government money-market funds.

 

Stablecoins reduce friction in payments and money transfers since settlements can clear within seconds versus hours or sometimes days with the traditional banking system. This can reduce risk from exchange-rate volatility for foreign counterparties. They also have lower transaction fees than credit cards, wire transfers and other payment networks.

 

Businesses have nonetheless been reluctant to use stablecoins because of legal uncertainty. Gary Gensler, who led the Biden Securities and Exchange Commission, created a cloud over the market with threats of arbitrary enforcement. The goal of the Senate legislation, championed by Wyoming's Cynthia Lummis, Tennessee's Bill Hagerty and New York's Kirsten Gillibrand, is to lay out clear market rules.

 

For every dollar of stablecoins, issuers would be required to hold at least one dollar of reserves in short-dated Treasurys, bank insured deposits, government money-market funds, repurchase agreements backed by Treasury bills, and other liquid federal government-issued asset approved by regulators. This means they can't invest in risky, high-yielding assets.

 

Issuers with more than $50 billion in stablecoins would be required to disclose publicly and submit to regulators audited annual financial statements. Large issuers would be regulated by the Federal Deposit Insurance Corp. (FDIC), the Federal Reserve or the Comptroller of the Currency, though smaller players could choose to be regulated by states.

 

There's the biggest concern. The Senate legislation says stablecoins "shall not be backed by the full faith and credit of the United States" or subject to deposit insurance. But the FDIC insures bank deposits, and putting it in charge of regulating stablecoins may create the impression of an implicit government backstop.

 

When the Reserve Primary Fund broke the buck after Lehman Brothers went belly up in 2008, Treasury guaranteed money-market funds to stabilize markets. Ditto for Silicon Valley Bank's uninsured deposits in 2023. If a popular stablecoin breaks the buck, will the feds come to the rescue?

 

It would be better if Congress put the Securities and Exchange Commission or Commodity Futures Trading Commission in charge of regulating stablecoins to avoid the impression that they are guaranteed by the government. And letting stablecoins fail in the first instance would set a useful precedent.

 

Broader adoption of stablecoins will create new financial risks that will have to be closely monitored, but the legislation at least establishes safeguards to protect users. It also subjects issuers to anti-money laundering laws [1], which could help law enforcement crack down on cartels that move money with stablecoins.

 

The hope is that good stablecoins will chase out bad. Mr. Trump on Wednesday urged the House to advance the bill "LIGHTNING FAST" with "NO DELAYS, NO ADD ONS." The House can and should still make constructive changes blocking potential bailouts. But it's a welcome development that Congress is laying out rules for regulators so the latter can't write law on their own.” [2]

 

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Stablecoins, being built on blockchains, offer a level of transparency in their transactions that is different from traditional banking systems

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Potential benefits for fighting money laundering:

 

    Public Ledger: Stablecoin transactions are recorded on a public ledger (blockchain), making them theoretically traceable. This differs from traditional bank transactions which are not publicly viewable.

    Reduced Anonymity: While not completely anonymous, crypto assets, including stablecoins, are generally less anonymous than physical cash because transactions are preserved on a public ledger.

 

Challenges and concerns:

 

    Identifying Real-World Entities: While transactions are on a public ledger, connecting a specific blockchain address (public key) to a real-world person or entity can be difficult. This can make it challenging to identify and prosecute illicit actors.

    Opportunities for Crime: The relative privacy offered by stablecoins, while useful for individuals in some circumstances, can also be exploited to facilitate criminal activities. Reports indicate that illicit actors have received significant amounts of stablecoins.

    Regulatory Frameworks: Regulation of stablecoins under money-transmitter laws and other digital asset frameworks is crucial to implement anti-money laundering (AML) and Know Your Customer (KYC) requirements.

 

Comparison with bank money:

 

    Traditional Banking: Traditional financial institutions have established AML/KYC regulations and processes for monitoring transactions and identifying suspicious activity.

    Stablecoins: While stablecoins can offer transparency through their public ledgers, effective AML efforts depend heavily on robust regulatory frameworks and the ability to link on-chain activity to real-world identities.

 

Conclusion:

 

Stablecoins' public ledger structure does offer some advantages for fighting money laundering compared to purely anonymous methods like cash. However, this advantage is not absolute. The ability to effectively combat money laundering with stablecoins relies on a combination of:

 

    Technology: Leveraging blockchain analytics to track transactions.

    Regulation: Implementing and enforcing strong AML and KYC regulations for stablecoin issuers and platforms.

    Interagency Cooperation: Collaboration between law enforcement and regulatory bodies to identify and pursue illicit activity.

 

While progress is being made in this area, the challenges of identifying real-world entities behind stablecoin addresses and the potential for misuse require continued vigilance and the development of effective strategies to mitigate the risks of money laundering.

 

1. A Senate Stablecoin Breakthrough. Wall Street Journal, Eastern edition; New York, N.Y.. 21 June 2025: A14.