Meanwhile, regulators are watching those developments very closely. Both the U.S. and Europe are working on specific legislation for stablecoin issuance, use, governance and reporting standards.
Here’s what investors should know about this evolving asset class.
How Do Stablecoins Work?
Most USD-backed stablecoins are just deposit accounts on which the depositor would be paid no interest (under the terms of the proposed GENIUS act), says James Faucette, who leads Morgan Stanley’s U.S. Fintech and Payments Research Team.
Under the GENIUS Act, “the financial entity that sponsors the account is able to generate net interest income by investing the deposited assets — just like a typical checking account, but without FDIC insurance,” Faucette says. “However, a key difference to checking accounts is that any transaction into or out of the stablecoin account can be fully cleared immediately.”
How Are Usage Costs Calculated?
Stablecoin usage costs usually involve transaction fees and charges to convert them into other assets. In general, there’s no cost to open a stablecoin account and their direct transaction fees are lower than in the traditional payments and remittance system.
As no interest is to be paid on USD stablecoin accounts (per the proposed GENIUS act), the cost for the consumer is effectively the potential interest income lost on the deposited funds. As such, stablecoin usage costs would likely increase during a period of rising interest rates and fall in periods of declining rates.
When Are Stablecoins Used?
Stablecoins can be provide incremental transactions utility in situations where traditional financial tools aren’t are excessively cumbersome or entirely unavailable. Stablecoins can provide unique abilities for transactions that satisfy key underlying requirements:
- Exact timing can’t be predicted
- Exact value isn’t known ahead of time
- Particularly large amounts involved (e.g., more than $100,000)
- Inter-organization transactions
- Requires immediate clearing
- Requires immediate fund availability
These situations could include brokerage/trading, especially for crypto trading activities, settlement of online gaming transactions, and some cases of international commerce.
How Could Stablecoins Affect Payment Networks?
The increasing volume of transactions with stablecoins could be seen as a threat to traditional payment networks, such as credit card companies.
However, the impact should be limited as those companies have been preparing for years to enable stablecoin usage, Faucette notes.
“Because stablecoins are really just a form of deposit account, we think these developments likely represent more incremental opportunity rather than risk for the payment networks,” he says.
What Are Merchant-Sponsored Stablecoins?
There have been some reports about large retailers introducing their own stablecoins for consumers.
Those offerings are essentially the equivalent of digital prepaid gift cards: The consumer will give funds to the merchant, which the merchant will hold, and the consumer can at some future date use the deposited funds for purchases of goods and services.
What Are Regulators Doing?
On June 17, the U.S. Senate passed, in a bipartisan vote, the Guiding and Establishing National Innovation for U.S. Stablecoins Act, also known as the GENIUS Act. The legislation creates a framework that governs how stablecoins are issued, used and reported.
The bill is now under discussion at the House of Representatives.
“If passed, the act could help reduce the ambiguity that has emerged periodically as to what kinds of institutions could issue stablecoins and what the issuing entities’ obligations are to stablecoin holders,” Faucette says.
Is There an Impact on Treasuries?
The Genius Act determines that stablecoin issuers must maintain reserves backing the stablecoin on a one-to-one basis using U.S. currency or other high-quality liquid assets. That is actually more restrictive than the rule for U.S. money market funds, for example, which can buy Treasury securities with a remaining maturity of 397 days or less.
The Genius Act winds up encouraging Treasury bills as a preferred collateral choice.
“We think growth in stablecoins will be incrementally supportive for demand for short-end U.S. treasuries, especially bills,” says Marty Tobias, a member of Morgan Stanley’s U.S. Interest Rate Strategy team. “Any sort of incremental growth in the stablecoin industry will lead to additional demand for short-dated Treasuries, and it will provide the U.S. Treasury much needed flexibility in its issuance strategy and funding future increases in the deficit.”
How Could Stablecoins Affect FX Markets?
The daily volume of transactions with stablecoins is around $100 billion2.
Although the volume has been growing steadily, those amounts are tiny compared with the global currency market, where net daily transactions surpass $7.5 trillion.
“Given such a market capitalization and average daily turnover, stablecoins are currently not large enough to drive movements in liquid currencies,” says Morgan Stanley Strategist Zoe Strauss. “Our scenario analysis suggests that a significant future FX impact would only occur under very high growth rate assumptions."
