Financing Infrastructure Evolution: The Emergence of Stablecoins

The GENIUS Act, recently signed into law by President Trump, marks a significant milestone as the first comprehensive crypto legislation enacted by Congress. This groundbreaking law sets forth a regulatory structure for the $250 billion stablecoin sector, a digital asset class that is increasingly gaining traction as the new generation of digital infrastructure.

Tether (USDT) and USD Coin (USDC) are the two largest players in the stablecoin market, accounting for over 85% of the total supply and exceeding $230 billion this year. These digital assets, engineered to maintain a consistent value, typically linked to a fiat currency like the US dollar, are not only popular among cryptocurrency traders but are also being used beyond their initial purpose.

In countries with unstable currencies, stablecoins are serving as a "cozy blanket" for savings, boosting profits for merchants and retailers with high payment volumes, and playing a role in decentralized lending protocols. In emerging markets, they can provide a stable store of value during periods of inflation.

One notable example of stablecoin adoption is PYUSD, issued by Paxos Trust Company. In New York, Paxos is seeking to convert its New York trust license into a national trust bank charter under the US Office of the Comptroller of the Currency (OCC). This move would enable stronger regulatory oversight and faster payment processing without taking deposits or issuing loans, aligning with the new legal framework created by the GENIUS Act in the USA. Paxos aims to offer the highest level of regulatory supervision for PYUSD in this transition.

The financial industry can benefit from stablecoin adoption, but it also comes with risks and concerns that need to be addressed. One potential concern is de-pegging, or the breaking of the 1:1 "peg" between the stablecoin and the underlying currency. This was evident with the collapse of Terra Luna's UST in May 2022. However, USDT and USDC, the two largest stablecoins, are backed by reserves, unlike UST which was prohibited by the GENIUS legislation due to its algorithmic connection with another coin.

PayPal has also joined the stablecoin bandwagon with its new "Pay With Crypto" system. This service allows over 100 different cryptocurrencies, including Bitcoin, Ethereum, USDT, and USDC, to be accepted at checkout by various US retailers and businesses. The cryptocurrencies are converted into fiat currency or PayPal's stablecoin, PYUSD, before being credited to the merchant's account. This service simplifies international trade, increases retailers' profit margins, and decreases transaction fees associated with processing foreign credit cards.

However, it's important to note that PayPal's new service has not yet been licensed by the New York State Department of Financial Services for residents of New York.

The rise of stablecoin production is causing an increase in the market for short-term government debt, helping to control short-term borrowing rates and increase Treasury liquidity during periods of increased issuance.

While the US has been slower to introduce a stablecoin bill compared to regions like Europe, Hong Kong, and Singapore, the GENIUS Act is a step towards regulating this rapidly growing sector, ensuring its stability and security for the American public.