Dollar Stablecoins Are Great for Users and the US Government

Mark Hays’ recent opinion piece in CoinDesk titled “Stablecoins Are Not Worth the Risk” is off-base, both in describing the risks and by dismissing the benefits of these novel financial assets. A properly designed dollar coin is safe and desirable, especially for the very people Mr. Hays, a senior policy analyst at Americans for Financial Reform, aims to protect.

Omid Malekan, an adjunct professor at Columbia University Business School, is the author of several books including “Re-Architecting Trust: The Curse of History and the Crypto Cure for Money, Markets and Platforms.”

First, some history: People have been using claims on a reserve as payment instruments for a thousand years. Paper money itself was originally invented as a receipt for metal held by a bank or money changer. Eventually, merchants realized it was easier to pay each other with the receipts than the metal itself.

See also: Paxos 'Categorically Disagrees' With SEC That BUSD Is a Security

As I explain in my book “Re-Architecting Trust,” that basic design hasn’t changed much in a millennium, and things like bank checks, money orders and mobile payments operate on the same principle. Today, the vast majority of payments are made with transferable claims on a balance sheet.

Fiat-backed stablecoins are no different. Financially speaking, sending someone 100 USDC is no different than sending them $100 via Venmo. In both cases, one user is handing over a claim against a balance sheet – Circle’s versus PayPal’s – to another. From the issuers point of view, each dollar held by its user is just a liability, to be matched against equivalent assets.

So which is safer?

Here's where things get interesting, because from the point of view of safety a properly designed stablecoin is more secure than anything that came before. That’s because half of the balance sheet of the issuer is recorded on-chain and can be verified in trustless fashion.

A good payment provider is one that always matches its assets and liabilities with like-instruments. Regulations and oversight are crucial in making sure they do. For Venmo, this means parent company PayPal’s regulators need to constantly collect data on user balances (liabilities) and check they match reserves in liquid capital (assets). Awkwardly, the primary source of data for PayPal’s liability is PayPal itself.

This is a bit like police officers having to ask drivers how fast they were going before issuing a speeding ticket.

Sure, there are reports and audits (and PayPal has likely always behaved responsibly) but the opacity is unavoidable. Stablecoin issuers are different because their liabilities – the tokens they issue – are visible on-chain. Even Tether, the much-maligned stablecoin issuer, can’t lie about token balances. Here they are.

Mark Hays can’t say the same thing about PayPal.

Instead, Hays focuses on strawman arguments against poorly designed stablecoins like terraUSD – the decentralized stablecoin that maintained its stability with a faulty algorithm. This is a new ecosystem and, like all new industries, bad ideas come (and fail) all the time.

Even the first modern credit card, issued by Bank of America in 1958, was a disaster, complete with fraud, condemnation and regulatory scrutiny. Sound familiar?

Even if safe, are they preferable?

My colleague Austin Campbell has a helpful blog about different types of stablecoins and their potential impact. Mark Hays is right that stablecoins need to be regulated. But he’s dead wrong about their utility. Dollar stablecoins can be a powerful force for economic inclusion.

See also: Stablecoins Are Not New. So Why Are Regulators Attacking Paxos? – Austin Campbell

Like other critics, Hays is a westerner of means. That means he holds dollars and gets to use things like credit cards. This is not a luxury afforded to a substantial portion of the global population – people living in countries with high inflation and low access to banking.

See also:

Defenders of the status quo should spend a month living in Argentina, Egypt or Nigeria. If not convinced, they should take a walk through countless poor and immigrant communities in the U.S. where pseudo-financial services like check cashers dominate.

If still not convinced, they should try sending large international wire on Saturday morning. God help them!

Congress will come around too

Dollar stablecoins aren’t just great for users, they are also great for the U.S. government because they increase demand for government debt at a time of high inflation and high deficits. Products like Tether’s USDT and Circle’s USDC have already created over $100 billion in new demand for U.S. Treasurys, demand that’s much needed given the risk of de-dollarization.

This makes a properly designed and regulated one the ultimate win-win. Great for the oppressed abroad and the U.S government at home. That’s the real reason congress is coming around.