Recently, the U.S. government has cast a dim look on stable coins, a class of cryptocurrency which is pegged to a fiat currency, typically the U.S. dollar. One of the more provenance examples is USD Coin (USDC-USD), which as of this writing is ranked number five in terms of market capitalization. Though popular for facilitating convenient digital wealth storage and convertibility to other cryptos, USDC also faces regulatory concerns.
Primarily, investors of digital assets gravitate toward stable coins because they “freeze” profitable gains in the extremely volatile crypto sector. For instance, if you saw “paper” gains of 10% for a particular asset, you wouldn’t realize the gains until you sold your holdings. However, selling into U.S. dollars can be cumbersome due to the conversion process between crypto to fiat.
And what if you saw an opportunity you wanted to advantage right away? Some exchanges may impose a waiting period to convert fiat back to crypto, which can be maddening. In the decentralized universe, a day is like a thousand years, and a thousand years is like a day. However, stablecoins like USD Coin essentially provide a dollar alternative, enabling its conveniences without its administrative drawbacks.
Well, the government sees one critical drawback with USD Coin and its ilk. If the assets backing the valuations of these stablecoins don’t really exist, then confidence could quickly erode, causing the blockchain equivalent of a bank run. Therefore, in the name of consumer safety, the Federal Reserve want to implement regulations.
Personally, I see a mountain of trouble ahead for the government. Stablecoins are legitimate cryptocurrencies; they just feature an alternative use to the traditional capital-gains narrative. So regulating one class of crypto but leaving other classes in vague limbo seems unrealistic.
As well, the issue of personal choice comes into play here. While the government is right to be concerned about financial stability, stablecoins like USD Coin ultimately represent individual freedoms. Because of the market risks associated with all classes of cryptos, they in turn compensate stakeholders with higher return potential.
Even if the government succeeded in regulating stablecoins — which would be a remarkable accomplishment — the control mechanisms imposed would likely suck the return potential (such as decentralized high-yield programs) out of the sector, thereby hurting taxable revenue streams.
Thus, it’s possible that government officials are making noise for its own sake.
On the date of publication, Josh Enomoto held a LONG position in USDC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
