Crypto Goes Mainstream with Passage of Genius Act….But Could Stablecoin Cause a Future Without Bank Accounts and Credit Cards?

WHAT IS STABLECOIN?

The Act defines a “payment stablecoin” as a digital asset intended for use in payments or settlements and requires that each such stablecoin be backed on a one-to-one basis with reserves such as U.S. dollars, Treasury securities, money received under repurchase agreements, or similarly liquid assets approved by regulators. Sec. 2(22), Sec. 4(a). In other words, stablecoin is designed to be used like money to buy things. Stablecoin is very similar to having your long-term savings in a money market account. Similar, to stablecoin, funds in a money market account are pegged one-to-one to the dollar and backed by the same assets as stablecoin.

More importantly though, it is the difference between stablecoin and money in a money market account the could cause a ground shift. Stablecoin is a digital currency, and it can be kept in a digital wallet on your smart phone. If the seller of what you are buying 1) has the capability to accept a digital wallet payment and 2) accepts stablecoin, you could use it just like a debit card or credit card. As a segway into the next section instead of thinking about how stablecoin is like debit and credit cards, we should focus on how stablecoin is different.

HOW COULD STABLECOINS THREATEN BANKS AND CREDIT CARDS

If you use a credit card to purchase something you are using credit provided by an issuing bank and processing services by a card issuer such as Visa or Mastercard. If you use a debit card, you are using funds in a deposit account at a bank. In other words, you are using one bank deposit account as an intermediary or multiple using a credit card. Purchasing goods this way requires processing by the intermediary, which can cause delays, administrative costs, and fees. Stablecoin has the potential to cut out these intermediaries. Consumers could start paying sellers with stablecoin directly from their digital wallets on their phones to a seller’s digital wallet.

Further, both buyers and sellers have incentives to move toward this model of digital currency. For one, sellers, if serious about not losing potential sales, generally must accept as payment the big four card issuers (Visa, Mastercard, American Express Discover). In return these sellers pay merchant fees on these transactions. Most businesses, including Amazon, Wal Mart and Target, would love to cut out the card issuers and related fees, but they really have no choice. Sellers that accept stablecoin to their digital wallet will not pay these transaction fees, and the fees not paid on these transactions go toward higher profits for the business or used to cut prices without sacrificing your margin to undersell your competitors. Deposit accounts with banks also have fees, delay and bank savings account interest rates that underperform annual inflation. I am not saying it will happen next month or next year, but the incentives are there for buyers and sellers to shift to stablecoin. The passage of the Genius Act by creating stablecoin pegged to the value of the dollar along with a legal and regulatory framework providing legal clarity on crypto could be a watershed moment opening the door to a future where card issuers and banks are either obsolete or play a much minor role in our financial system. What effects would such a shift have on our banking system and government’s ability to regulate monetary policy? Trying to answer that question will have to be for a future blog.