Stablecoins—digital currencies tied to real-world currencies or assets, such as the U.S. dollar—are quickly developing into a key point of contention on Capitol Hill. The $230 billion stablecoin industry would benefit greatly from Donald Trump’s promise. His vision for the U.S. would make it the world’s “crypto capital of the planet.” Lawmakers in both chambers are working on legislation to regulate these digital assets. There are worries about hidden dangers and the impact of industry self-interest.

Legislative Efforts to Regulate Stablecoins

This is particularly timely, as right now the Senate is debating a bipartisan stablecoin bill. It’s bipartisan, indeed, having Republican co-sponsors Senators Bill Hagerty, Cynthia Lummis and Tim Scott and Democratic Senators Angela Alsobrooks and Kirsten Gillibrand. The House has produced its own bill markup. Further, it has received significant bipartisan support, going out of committee with approval from six Democrats of the eight voting members.

These legislative efforts aim to develop a comprehensive regulatory framework for stablecoins. They address issues about moral hazard and the broader effect on the financial system. To make their fiat-pegged offerings, stablecoin issuers leverage real-world assets like U.S. Treasury bonds to back their coins. The basic premise behind a stablecoin is that any one dollar-denominated stablecoin can be exchanged for exactly one dollar.

"There's a valid substantive reason to prioritize it, in that stablecoins exist and we have been talking about it for a while, and I think there's also some political reason why it's being prioritized." - Tim Massad

Concerns and Criticisms of Stablecoins

Aside from this public push for regulation, stablecoins with vulnerabilities have been criticized and under attack. In recent testimony, former Securities and Exchange Commission Chair Gary Gensler went so far as to compare stablecoins to “poker chips at the casino.”

Yet, multiple incidents have shaken confidence in the long-term stability and reliability of these digital assets. TerraUSD, an “algorithmic” stablecoin with no assets behind it in the real world, went through a historic collapse. USD Coin, the second-largest stablecoin, had an instant drop of more than 13 cents. This decline came amidst news that a sizeable portion of its cash holdings were in jeopardy following the 2023 collapse of Silicon Valley Bank.

"If people think that even a few pennies of their dollar are at risk, they are going to run," - Wilmarth

Critics argue that the nature of the assets that back stablecoins poses a huge risk. The Senate bill would allow stablecoins to use money market funds as backing. Yet these very same funds needed a federal government bailout during the financial crises of 2008 and 2020.

Industry Influence and Political Maneuvering

The stablecoin industry has not been shy about flexing its muscles, working hard behind the scenes to inform the developing regulatory environment. IPO co-founder Tether also works very closely alongside Commerce Secretary Howard Lutnick. His previous company, Cantor Fitzgerald, now handles a good chunk of Tether’s U.S. Treasury bonds. There’s no indication that the Trump family has followed his lead and launched a stablecoin. They’re kicking off their campaign via World Liberty Financial. The announcement of the new Trump stablecoin surprised many leaders in the crypto world. They’d been counting on stablecoin legislation to ensure a win this Congress.

"Passing legislation gives them a first-mover advantage to profits that are to be gained. We saw that with the Trump meme coin, where a lot of people lost out but it didn’t matter because Trump’s platform was making fees," - Mark Hays

The GENIUS Act in the Senate would largely accomplish the same industry-friendly goals as the STABLE Act in the House if passed. As our friend Arthur Wilmarth would point out, stablecoins have been around for ten years now. After all, folks seem to be doing everything possible to make them into an interoperable, general-purpose payment instrument.

Critics are raising a red flag. They caution that if Big Tech enters the stablecoin space, a run on their coins could cause a more widespread financial contagion.