As we noted last week, a new study finds that stablecoins and other crypto payments use declined from 2022 to 2024 by about a third, now including less than two percent of U.S. households. Further, these are disproportionately unbanked, with the only bit of growth in payment-stablecoin use coming from households with poor or very poor credit scores. Payee choice was the most important driver of decisions to use a payment stablecoin. These jarring facts brings the trillions-of-trillions of dollars stablecoin dreamers back to earth with a hard thump. They might still prevail, but only if banks don’t quickly counter with potent products and nonbanks also get the rules they want and the payees they need to redefine their problematic stablecoin value proposition.
One critical battle is already being waged. Banks are fighting hard to prevent indirect payment of incentives that advantage stablecoin holders and thus undermine transaction-account alternatives. This question is among the most important on which Treasury now seeks comment before it quickly starts writing rules. The Senate Banking Committee might also revise the GENIUS Act at cost of bankers.
Despite the plethora of questions in Treasury’s recent request, another important issue is omitted: who may own a nonbank stablecoin issuer. The Act as is contains a prohibition on ownership by publicly-traded nonfinancial companies, but Treasury can waive this ban if it and other regulators reach several findings that won’t be too hard to find if Treasury wants them unearthed. Pending changes in law and rule could also significantly erode the restrictions on who may own an issuer, making the banking/commerce barrier even more porous.
As we’ve noted before, tech platform companies and large retailers have a strong incentive to persuade consumers to switch from bank deposits to stablecoins that bypass interchange fees on debit and credit cards. There’s billions of dollars on tap if they can persuade consumers to use “Amazon dollars” and the like, and I doubt any of these firms will be slow to figure out which incentives comply with whatever prohibition might be in place but still matter to their customers.
What of all the reasons to love your bank deposit – FDIC insurance for starters – and the current, friction-free payment system? Yes, it’s idiotically slow, but if someone steals your money, banks are legally required to give it back to you and have the resources to meet this mandate. Sometimes it’s way too slow – see my memo about a fraud visited on our company. But, we got our money back in the end.
This is known as payment finality and consumers will miss it a lot if stablecoins can’t match it. Reserve assets are meant to secure stablecoin valuation, not to fund fraud remediation, which many issuers will be loath to do if they don’t have to. The GENIUS Act leaves all too much to the imagination and Treasury so far doesn’t seem to think it a worry. Too bad; it is.
Perhaps due to the rush to get it to the President’s desk, the new law only addresses the role of payment stablecoins as money via the reserve-asset provisions and its efforts to prevent money laundering and sanctions evasion. I’m not at all sure these provisions ensure that payment stablecoins are sound money when it comes to serving as a store of value, but they are wholly inadequate when it comes the principal purposes of payment stablecoins: serving as a medium of exchange. For this to occur, payment stablecoins need not only to be fast, but also to be revocable, ubiquitous, and final.
Payment stablecoins desperately seeking master accounts at the Federal Reserve may address the ubiquity issue, but they’ll still lose speed and leave fraud protections and finality unaddressed. The Fed should issue rules to ensure sound stablecoin payments if it grants access, but the law ties the Fed’s hands when it comes to the liquidity standards demanded of banks to ensure payment flows and the capital rules that back fraud-restitution and error-correction under even acute stress.
An axiom of effective payment systems is that they also have trustworthy, resilient, resourced settlement-and-clearing procedures. So far, the main stablecoin customers – crypto investors and illicit financiers – haven’t bothered to worry about this. The 98 percent of American households that don’t use stablecoins will at least wonder unless blandishments prove irresistible and memories of payment-system losses fade. If a reasonable number of households do switch, they might be very sorry when fraudsters realize that stablecoin issuers are easy pickings because they have yet to invest in effective risk mitigation and, in fact, might never do so until someone makes them. Here’s a thought for Treasury: ensure payment-stablecoins payment providers actually get funds to intended payees and payors get their payments back when money goes elsewhere.