Stablecoins: Bigger Than Bitcoin ETFs?

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By Matthew Hougan

The overarching theme of the current multi-year bull market is “the mainstreaming of crypto.” Crypto is moving from an asset class and technology accessed by few to one that is adopted by many.

The launch of bitcoin ETFs in the U.S. epitomizes this transition, but it’s not the only road marker. Others include BlackRock launching a tokenized Treasury fund on the Ethereum blockchain, Europe passing comprehensive crypto legislation, Ray Dalio calling on investors to own “non-debt money” like bitcoin, and more.

Last week, news broke of another major mainstreaming event that could be as big as—or bigger than—the ETFs. The news got limited coverage in the media, so I thought I would highlight it here.

The Mainstreaming of Stablecoins

The big news is that it looks like Congress may actually pass comprehensive stablecoin legislation this year.

I know, I know—sounds “meh.” But bear with me.

On Wednesday, Maxine Waters (D-CA), the top Democrat on the House Financial Services Committee, told Bloomberg that she and Committee Chairman Patrick McHenry (R-NC) would soon have a deal on comprehensive stablecoin legislation.

A similar bill, the Lummis-Gillibrand Payment Stablecoin Act, has been winding its way through the crypto-friendly U.S. Senate. Few, however, held out hope for the bill in the Democrat-led House, particularly in an election year. Until now.

Waters indicated that the deal already has widespread support, noting that she had discussed it with Senate Majority Leader Chuck Schumer (D-NY), Senate Banking Chairman Sherrod Brown (D-OH), and folks from the Federal Reserve, the U.S. Treasury, and the White House. 

Truth be told, the winds have been quietly aligning behind stablecoin legislation in D.C. for some time. Consider:

• On April 16, Brown—one of crypto’s harshest critics—surprised many by voicing his support for stablecoin legislation.
• In February, Federal Reserve Governor Chris Waller gave a speech noting that stablecoins could “strengthen the dominant role of the dollar” in global finance. 
• Earlier, both Fed Chair Jerome Powell and U.S. Treasury Secretary Janet Yellen came out in favor of stablecoin regulations.

This new bipartisan interest is driven by three factors.

First, as Fed Governor Waller noted, stablecoins can be good for the dollar. Stablecoins allow anyone around the world to store their wealth in an asset designed to track the greenback—and whose reserves are largely dollar-denominated. That helps the dollar maintain its position as the world’s reserve currency. Stablecoins effectively export dollars to the world.

Second, stablecoins are big buyers of U.S. Treasuries. In fact, stablecoins are already the 16th largest “sovereign holder” of Treasuries in the world, and that’s before we see the impact of this mainstream push.

And third, money. Tether, the largest stablecoin issuer, earned $6.2 billion in profits last year despite having just 125 employees. By comparison, Goldman Sachs earned just $8.5 billion despite having 45,000 employees. You can bet your bottom stablecoin: Wall Street is lobbying to be let into the stablecoin game.

We don’t yet know exactly what the McHenry-Waters bill would cover, but it’s likely to look a lot like the Lummis-Gillibrand Act, whose details you can read in a recent overview from S&P. The specifics, however, are less important than the big picture.

This would be the first piece of comprehensive crypto legislation ever passed by Congress. It would allow big banks like JPMorgan Chase to enter the space, moving them from foes to friends of certain aspects of the crypto/DeFi ecosystem. And millions of people and corporations would be introduced to the speed, low costs, and ease of use that crypto wallets, stablecoins, and blockchain-based payment rails offer.

We could be regularly paying for things with stablecoins in a few years. Don’t believe me? Ask Stripe, the $65 billion payments giant, which just announced a slick “pay with stablecoins” feature. Or Visa, the largest player in payments, which launched a fantastic “Onchain Analytics” platform to showcase the rising adoption of stablecoins.

How To Approach This as an Investor

This is one of those moments in crypto where the market could shift steeply upward in a “step function” manner. There was crypto before ETFs, and now there is crypto after. There is crypto before stablecoins go mainstream, and soon, if these trends continue, there will be crypto after.

You can’t expect appreciation from holding stablecoins directly—after all, they are designed to hold a stable value. But you can invest in the “picks and shovels.” In this case, that means Layer 1 blockchains like Etheruem and Solana, which host both stablecoins and the DeFi apps that interact with stablecoins.

In other words: Crypto is poised to take another huge leap into the mainstream.

Risks and Important Information

No Advice on Investment; Risk of Loss: Prior to making any investment decision, each investor must undertake its own independent examination and investigation, including the merits and risks involved in an investment, and must base its investment decision—including a determination whether the investment would be a suitable investment for the investor—on such examination and investigation.

Crypto assets are digital representations of value that function as a medium of exchange, a unit of account, or a store of value, but they do not have legal tender status. Crypto assets are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not currently backed nor supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies, stocks, or bonds.

Trading in crypto assets comes with significant risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks and risk of losing principal or all of your investment. In addition, crypto asset markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing.

Crypto asset trading requires knowledge of crypto asset markets. In attempting to profit through crypto asset trading, you must compete with traders worldwide. You should have appropriate knowledge and experience before engaging in substantial crypto asset trading. Crypto asset trading can lead to large and immediate financial losses. Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price.

The opinions expressed represent an assessment of the market environment at a specific time and are not intended to be a forecast of future events, or a guarantee of future results, and are subject to further discussion, completion and amendment. The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice, or investment recommendations. You should consult your accounting, legal, tax or other advisors about the matters discussed herein.