Stable coins are cryptocurrencies designed to maintain a value of $1. These coins are pegged to the U.S. dollar at a fixed ratio and are also meant to be backed by hard currency reserves or other forms of currency like treasury bills.
Washington is pushing harder to enforce regulation of stable coins, which might prove beneficial to the issuers of tokens and could also be good for some payment companies and banks. Stable coins have a market value of $140 billion that surged from a $24 billion valuation during the course of the year. Much of it is concentrated in a handful of coins including, Tether (USDT), at $73 billion, USD Coin (USDC) at $ 34 billion, and Binance USD (BUSD) at $ 13 billion.
Investors typically use stable coins instead of cash for trading, lending and as collateral for loans. One of the advantages of using stable coins is the high yields on some lending platforms- topping 7%.
The crypto market is now so large, making regulators nervous about the potential of a panic scenario. A few issuers aren’t entirely transparent about their reserve assets- some hold commercial paper, loans, and other cryptos or swap agreements with financial companies.
The current situation had the Biden administration alarmed with the treasury department issuing a report calling on Congress to create rules for coin issuers and other market players. One among its recommendations was to have issuers like “insured depository institutions” overseen by federal banking rules or to have separate regulatory agencies set up.
For the crypto diehards, the recommendations might be looked upon with much suspicion and cynicism. Still, it would appear that Wallstreet views the imposition of regulation on the use of stable coins as an inevitability.
“Appropriate regulation could act as a catalyst for institutional, retail and bank adoption of stablecoins, driving what we expect to be the next inflection point to broader digital asset adoption,” said Alkesh Shah, head of digital asset strategy at BofA.
A few beneficiaries of increased regulatory measures could include companies like Mastercard (ticker: M.A.), Visa (V), Western Union (W.U.), Silvergate Capital (S.I.) and Signature Bank (SBNY), according to BofA.
Mastercard and Visa are both heavily involved with developing payment systems with stablecoins, the goal of which is to accept, clear and settle transactions using the tokens in place of hard cash. Mastercard partnered with Bakkt Holdings (BKKT), a digital assets platform, to integrate cryptos into card rewards programs. Visa is also working with Coinbase (COIN) and lending platform BlockFi on different stablecoin products and services it wishes to incorporate into its payment system.
As if to demonstrate the sheer popularity of stablecoins, cross-border payments such as Moneygram International and Western Union are also integrating the cryptocurrency on their platforms.
The flip side of all this opportunity is what the adoption of stablecoins might mean for traditional financial institutions such as banks and payment companies that might stand the risk of being cut out of the payment loop. Because stablecoins can be used for international money transfers or remittances and can be utilized at virtually no cost to the sender or recipient, traditional institutions could stand to lose big with their 4% charge.