On Tuesday, ratings agency S&P released a report that examined eight of the leading stablecoins, revealing deficiencies in many of them.
It can be argued that a U.S. dollar pegged stablecoin would not only safely expand the money supply but also improve it. In fact, it would enhance U.S. economic growth by dividing our money supply into two parts.
The first part, the pegged stablecoin, would be used for faster and cheaper transactions. The second part, the U.S. dollars held in bank accounts, would be utilized to lower the cost of borrowing USD.
However, these economic benefits would only be realized with a specific type of stablecoin. Any coin that promises “yield,” “earnings,” or “dividends” is likely considered a security, and any transaction involving such a coin would trigger capital gains tax.
Even if the stablecoin were structured like Tether, which S&P assessed negatively, and did not promise any yield to holders, there would likely be little benefit to the U.S. money supply and economy if the stablecoin’s asset portfolio was not strictly limited to dollars in a bank account.
The significant and potentially fatal flaw with a stablecoin like Tether is the risk of a “run on the bank.” Any stablecoin that invests in assets other than U.S. dollars in a bank account cannot guarantee its holders that they can redeem their stablecoin at any time, all at once, and receive the full face value.
A true stablecoin can be sold and redeemed for exactly $1 and is assumed to have a stable value. It does not generate yield or appreciate, so there is no reason to “hodl” such a stablecoin.
However, it is assumed that stablecoins are faster, easier to transact with, and more valuable for transactions than fiat currency. This superior functionality would drive demand, allowing a stablecoin issuer/sponsor to profitably operate the stablecoin by retaining the fiat currency yield paid by the custodian bank for the U.S. dollar deposits.
At the same time, a true stablecoin would not compete for the same goods and services as fiat currency because it would be high-velocity money used solely for transactions. The dollar deposits held in a bank account to back the stablecoin would be stable long-term deposits that enable the bank to lend at lower rates.
As a result, a genuine pegged stablecoin would facilitate the expansion of the money supply without inducing inflation and reduce the cost of borrowing fiat currency.
Such a stablecoin does not encounter any of the issues associated with a central bank digital currency (CBDC). It seamlessly aligns with existing laws, does not disrupt the banking system, and prevents the government from utilizing currency as a tool for surveillance and control.