Stablecoin Regulation Is Coming. Why Payment Companies Could Benefit.
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Washington is getting closer to regulating stablecoins. That could prove beneficial to issuers of the tokensand could also help some payment companies and banks, according to a report issued Tuesday by BofA Securities.
Stablecoins are cryptocurrencies designed to maintain a value of $1. Theyre typically pegged to the U.S. dollar at a fixed ratio and are supposed to be backed by hard currency reserves or cash proxies like Treasury bills.
The market value of stablecoins has surged from $24 billion to $140 billion over the past year, according to BofA. Much of that is concentrated in a handful of coins, including Tether (USDT), at $73 billion; USD Coin (USDC), at $34 billion; and Binance USD (BUSD), at $13 billion.
Crypto investors use stablecoins instead of cash for trading, lending, and as collateral for loans. Yields on stablecoins are high on some lending platforms, topping 7%.
The market is now so large, however, that regulators are getting worried about a panic scenario. Some issuers arent transparent about their reserve assetsholding commercial paper, loans, other cryptos, or swap agreements with financial companies.
The worry is that a run on stablecoins could spill over into other markets as issuers scramble to sell assets to meet redemption requests. If a top stablecoin by market value were to become unpeggedthe implications would likely extend into traditional financial markets, writes Alkesh Shah, head of digital asset strategy at BofA. The risks for traditional assets should not be ignored, he added.
The Biden administration is raising alarms. The Treasury Department issued a report in early November calling on Congress to establish rules for coin issuers and market activity. Among its recommendations were regulating issuers like insured depository institutions, overseen by federal banking rules. If Congress doesnt act, the Treasury said, then regulatory agencies should step up.
Regulation may be anathema to crypto libertarians. But Wall Street now views stablecoin rules as inevitableand sees gains for the financial industry as a result.
Appropriate regulation could act as a catalyst for institutional, retail and bank adoption of stablecoins, driving what we expect to be the next inflection point to broader digital asset adoption, Shah writes.
Beneficiaries could include companies like
Mastercard
(ticker: MA),
Visa
(V),
Western Union
(WU),
Silvergate Capital
(SI), and
Signature Bank
(SBNY), according to BofA.
Mastercard
and Visa are both developing payment systems with stablecoins, aiming to accept, clear, and settle transactions with the tokens. Mastercard is working with
Bakkt Holdings
(BKKT), a digital-assets platform, to integrate cryptos into card rewards programs. Visa is working with
Coinbase
(COIN) and lending platform BlockFi on a variety of stablecoin products and services, BofA notes.
Companies handling cross-border payments, like Western Union and
MoneyGram International
(MGI), are also integrating stablecoins into their platforms. And digital-asset-focused banks like Silvergate and Signature stand to benefit, BofA, says, as natural partners in the ecosystem.
Granted, banks and payment companies could be cut out of the loop as stablecoins expand. A big use for stablecoins is international money transfers, or remittances, as a stablecoin can be transferred instantly through at virtually no cost to the sender or recipient. Thats hardly ideal for companies charging 4% or more for international transfers.
Yet banks and payment companies may have no choice but to adopt stablecoins. Washington now seems poised to nudge them along.
Write to Daren Fonda at daren.fonda@barrons.com