The Stablecoin Act: A Policy Error

The following is an opinion piece by Tom Howard, Head of Financial Products and Regulatory Affairs at CoinList.

Drafts of the Stablecoin Act that aim to ban Tether and other non-US stablecoin issuers from the US market due to offshore operations are circulating. This strategy is a significant policy error.

A robust global reserve currency thrives by exporting itself to foreign markets, not pulling it back home. Attempting to force all USD-denominated stablecoins to reshore deposits to US banks overlooks a critical monetary principle known as “Triffin’s dilemma,” which describes how exporting currency overseas strengthens international demand but risks domestic inflation if too much of that currency returns home.

While reshoring innovation can be beneficial, reshoring USD relates to monetary policy and is generally undesirable for the nation. In fact, stablecoin innovation presents an opportunity to export even more USD offshore, enhancing USD’s strength and liquidity as a global reserve currency.

The Market Wants Non-US Issued Stablecoins

USDT is the global stablecoin of choice in non-US markets, including Asia, Africa, and Latin America. Despite substantial efforts from competitors like Circle, US-banked stablecoins often come across as extensions of the US government, while non-US stablecoins are viewed as more autonomous. Users frequently choose non-US stablecoins due to concerns about their own governments’ monetary policies, seeking safety without US banking exposure.

What Does “Ban” Mean

Proposed drafts include various types of bans:
1. Issuance Ban: Non-US registered stablecoins would face restrictions on issuing from the US, which is reasonable for US-issued stablecoins.
2. Usage Ban: A ban on using unregistered stablecoins for transactions, potentially harming market choices and creating negative international externalities.
3. Financial Service Exclusion: A mandate for US financial institutions to cease all activities with non-compliant stablecoins, risking significant divestment from US treasuries.

Any Sort of Ban Would Backfire

1. Reduced USD Liquidity Globally: Trading bans would reduce a stablecoin’s liquidity against the dollar, leading to higher transaction costs and weakening global USD demand.
2. Inflation Risks: Reducing foreign bank USD holdings may exacerbate domestic inflation.
3. Geopolitical Risks: Foreign adversaries might exploit unfilled market demand to create their own USD stablecoins, undermining US currency.

Reshoring Foreign Bank USD Reserves

Forcing Tether to relocate reserves to US institutions could import significant volumes of USD back into the US, potentially heightening domestic inflation. International demand for offshore USD tokens would likely continue, encouraging competitors to occupy Tether’s niche overseas.
When USD is pulled back into domestic banking, it increases the lending supply, contributing to inflation while reducing foreign bank reserves critical for international USD liquidity.

Adversaries Could Displace USD

Non-US-issued stablecoins have found a significant market. A ban could allow foreign adversaries to offer USD-denominated tokens backed by foreign currencies, gold, or other assets, displacing USD demand and supply. China is actively developing financial alternatives, posing challenges to the US dollar.

US policy should encourage more USD holdings in foreign bank reserves to strengthen the USD globally.

A Better Path Forward

Amending the Stablecoin Act to exempt foreign-issued stablecoins would circumvent these issues. Allowing these stablecoins to operate and trade in the US, while labeling them as unregistered, higher-risk alternatives, could strengthen the dollar’s global position and promote innovation in financial technology worldwide.

Such an exemption would:
– Encourage global innovation to serve offshore USD demand.
– Enhance global USD usage without increasing inflationary pressures.
– Maintain market-based competition, allowing consumers to make informed choices based on risk disclosures.

Allowing regulated coexistence rather than outright bans on entities like Tether can strategically bolster the dollar, mitigate inflation risks, and foster continuous financial innovation.