The dilemma of stablecoin stability

“Commerce is based on trust,” Benjamin Franklin.

It's curious that today, the value of something seemingly avant-garde and innovative depends entirely on a much older and more traditional value: trust. The DLE defines it in its first meaning as "firm hope that one has in someone or something." As the quoted phrase indicates, trust is the central pillar in the business world, especially when we refer to projects that are built on good faith and have a genuine intention to endure.

In previous articles, I have shared some of the characteristics that cryptoassets generally present and more specifically those that have been called cryptocurrencies, which, given their nature, raise concerns regarding their support as they do not have the endorsement of a national government and are not supported by any measurable and auditable underlying asset. However, on this occasion, I will primarily refer to those that seek to distinguish themselves from the species by having been designed to maintain a stable value by being linked to a reference asset, such as a currency (Dollar, Euro, Peso), certain raw materials (such as gold, silver or oil) or even referenced to other cryptoassets. We will talk about "Covered Stablecoins" or covered stablecoins and their purpose is to reduce the volatility characteristic of other cryptocurrencies such as Bitcoin and Ethereum, facilitating their use in transactions and as a store of value.

Their advantages: They reduce volatility compared to other cryptocurrencies, facilitate transactions and are used for international payments and remittances, they have greater liquidity which speeds up their exchange in crypto markets, and are useful in decentralized finance (DeFi), loans and smart contracts. The disadvantages: Dependence is generated on the underlying asset and therefore its stability is related and depends on it, if it fails or weakens, the stablecoin will do so consequently, those that are backed by money will be linked to the fate of the underlying currencies, as well as the interactions with the regulated financial entities that safeguard the deposits in question, and finally, an aspect that generally impacts all crypto assets is that of government regulation, along with the associated actions that are prevention, supervision and, where appropriate, the power to sanction by government authorities.

Paradoxically, as I explained in the article "Cryptos, rules of fascination and revelation" published in this newspaper, an essential part of the appeal of cryptoassets is precisely their ability to fly under the radar in most cases, the ambiguity or even lack of regulation in several countries, etc. But will these assets still be attractive when they are fully regulated and supervised? This point becomes relevant when we see the general trend toward increasing the level of regulation applicable to the assets transacted, the subjects involved, the activity in general, and, of course, the empowerment of authorities with new and special powers tailored for the occasion.

As I mentioned in another post, President Trump had clearly and expressly expressed his disagreement with cryptocurrencies, making statements as late as 2021 in which he pointed out that "...Bitcoin seems like a scam..." and just three years later, precisely at the 2024 Bitcoin Conference, among other things, he stated that his plans (remember that at that time he was still campaigning) included "...making the United States the crypto capital of the planet and Bitcoin the world's superpower...", in addition to raising the possibility of generating part of the federal and local reserves in Bitcoins. The rest follows suit. First, the radicalization of the American government's position against the issuance of Central Bank Digital Currencies, an aspect that, despite the position originally held by Jerome Powell, has clearly already occurred and was confirmed by the same official before a commission of the United States Congress.

Taking a step back, when reviewing the geopolitical landscape and the guidelines under which the current Trump administration is operating, there are certain aspects that help understand this drastic change in policy (and even Donald Trump's personal opinion). Perhaps the most relevant is the fact that the issuance of a Digital Dollar necessarily entails coordination with other nations and/or blocs for purposes of cybersecurity, operation, exchanges and compensation, system compatibility, etc., and of course, compliance with the general regulatory frameworks of international entities and organizations such as the Bank for International Settlements and the International Monetary Fund, for example. This is contrary to the policy maintained thus far, with actions aimed at withdrawing from the WHO and NATO, among others. In short, the goal is to reduce US dependence on foreign countries and strengthen its strategic positions, also financially, in order to mitigate the risk of the dollar losing its status as the primary international benchmark. Under this scenario, strengthening American stablecoins and even integrating them as part of their reserves seems to be in line with this.

So far, the conceptual part has been explained, but to reach the level of implementation being proposed, the death step is precisely the regulatory part; that's right, the dreaded and tedious regulation. Thus, beyond the attractive part of the figure, which is what is usually discussed in forums, where are stablecoins currently standing, regulatory-wise? To answer this question, it must be emphasized that the first comprehensive regulation in existence in the world is the one enacted by the European Union and, for practical purposes, is known as the MiCA (Markets in Crypto-Assets) Law. It was published and entered into force in June 2023, although it includes various transitional provisions for the issuance of secondary regulations and other operational aspects, granting, for example, a 12-month period for complementary regulations regarding stablecoins (June 2024). As for the United States, they have experienced significant delays in their legislative processes, largely due to the federal elections and the country's general political climate, which, as mentioned above, recently took a 180-degree turn on the matter. In that regard, our neighbors are still working on a regulatory framework.

Pending the definition of the regulations in question, we can advance the positions expressed by various important national and international factors on the matter. Such as the Federal Reserve, which has insisted on the need for a comprehensive regulatory framework. This makes sense considering that part of the idea is to generate reserves in cryptocurrencies, which cannot be achieved under current regulations. Due to its relevance, if implemented, it must be regulated in sufficient detail so as not to affect the financial stability of the system. For its part, the Treasury Department has also described as imperative the need to generate a comprehensive regulatory framework that balances technological innovation and payment efficiency with the necessary prudence to avoid liquidity risks and systemic vulnerabilities. The Securities and Exchange Commission (SEC) in fact, just published last month (4/04/25) its “Statement on Stablecoins” in which it specifies that, by meeting the established criteria, the creation and redemption of these currencies (covered stablecoins) will not require registration procedures such as those usually required for financial instruments, in line with the guideline of providing regulatory frameworks that facilitate innovation without putting investors at risk. The FDIC does not have direct jurisdiction over the operation of these assets, but since they can impact the financial situation of banks, it has also emphasized the need to regulate the issue and make rigorous evaluations for the benefit of the banking ecosystem.

It should be added that in the US, in addition to certain sectoral adjustments that have been made (such as the aforementioned SEC), there have been a series of legal initiatives, none of which have reached approval and promulgation. However, the most advanced currently appear to be those known as the Stable Act and the Genius Act. If we compare these regulatory structures with the MiCA Act, there are several important differences. As I mentioned, the European standard is comprehensive, complete, objective, adjectival, and organic. It regulates subjects, activities, and purposes, and gives rise to the existence of special authorities. It covers cryptocurrencies in general, stablecoins, and covered stablecoins. The North American proposals, however, are more focused on covered stablecoins. It appears that the Stable Act prioritizes stability and consumer protection, while the Genius Act seeks to optimize market efficiency and foster financial innovation.

Ultimately, the key to value, that is, trust in these assets, will depend directly on the established control mechanisms, such as 1:1 support obligations between cryptocurrencies and currencies (which could be cash, Treasury bonds, or certain authorized low-risk, high-liquidity securities) deposited in regulated financial institutions; the timeliness and transparency of publicly accessible information; direct and coordinated oversight between local and federal authorities; and the possibility of specialized audits by independent third parties, among others. The expectation is that the Genius Act will be approved, as it is currently further along in the legislative process and, in the Senate Banking Committee votes, obtained 18 votes in favor and 6 against, while the Stable Act continues to be discussed in the House of Representatives. This is expected to be defined in the coming months; the United States has no time to waste.

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