GENIUS through 3 Lenses: Central Banker, Researcher, Venture Capitalist

While writing an analysis of the GENIUS Act and stablecoins for a financial journal in Asia, I sifted through many documents. Among them, one video and two articles stood out, each offering distinct perspectives on stablecoins. Here are my takeaways:

First up is an engaging online conversation between Jean-Pierre Landau, a former Second Deputy Governor of the Banque de France and current affiliated Professor of Economics at Sciences Po, and Markus Brunnermeier of Princeton University, titled “Who is Afraid of U.S. Stablecoins?” Link here

Drawing from his central banking background, he shares several insights on GENIUS and stablecoins:

- New Vision for U.S. Dollar: The U.S.’s strategic shift away from the dollar’s traditional role as a store of value, which has driven excess capital inflows and dollar appreciation. Instead, the U.S. aims to sustain dollar dominance by channeling external flows into its debt to fund fiscal policies. Stablecoins, backed by short-term treasuries and cash, align perfectly with this goal.

- International Monetary Competition: Dollar-denominated stablecoins could spark international monetary competition. Unlike the dollar’s unchallenged store-of-value status, digital networks introduce a new playing field for countries with superior network efficiency, such as China.

- Stablecoin a Threat to Monetary Sovereignty: He also flags stablecoins as a potential threat to monetary sovereignty. In countries with fragile currencies, high inflation, or exchange controls, widespread use of foreign stablecoins could undermine the unit of account and medium of exchange, disrupting central banks’ monetary policies.

- Two Gaps in GENIUS: He points out two critical gaps in the GENIUS Act: unclear redemption rules and insufficient guidance on blockchain interoperability. Without access to the Fed’s Lender of Last Resort (LLR), stablecoin issuers might struggle to liquidate treasuries during a market shock to meet redemption demands. Additionally, the lack of interoperability standards could hinder stablecoin’s cross-chain activities.

- Stablecoins not Welcomed: European banks, he notes, are particularly wary and see stablecoins as an even greater threat than their U.S. peers.

The second source, an article by MIT’s Digital Currency Initiative (DCI) titled “The GENIUS Act is Now Law. What’s Missing?” echoes Jean-Pierre’s concerns about the lack of redemption detail, noting that GENIUS leaves issuers and regulators to figure it out.

It’s concerned about how to ensure stablecoins consistently maintain par value in the secondary market. Jean-Pierre, however, attributes the fluctuation to less liquid reserve assets, such as commercial paper. Though, GENIUS’s strict reserve backing rules could mitigate this issue.

Just as Jean-Pierre does, the DCI article calls out the absence of interoperability standards. Since blockchains are siloed, cross-chain transfers rely on bridges, which come with risks and vulnerabilities. Stablecoins face the same challenge.

Another point raised by the article: while GENIUS prohibits issuers from paying interest to stablecoin holders, it doesn’t prevent third parties, e.g., exchanges, from offering yield-bearing products on top of them. Link here

The third perspective comes from Nic Carter of Castle Island Ventures in “Situating Stablecoins in the Payment Landscape.” Link here

Nic categorizes payment networks along push vs. pull, consumer vs. institutional, domestic vs. global, closed vs. open loop, and retail vs. enterprise. By doing so, Nic concludes that stablecoins are push, global, private, and support both retail and enterprise.

The two charts below illustrate his framework:

Source: Nic Carter

Source: Nic Carter

Regarding stablecoin’s par value, Nic thinks that market forces, such as arbitrageurs and issuers, will generally bring a peg back to 1:1 if it deviates to a discount or a premium.

As an investor, Nic highlights a potentially huge investment opportunity: Developers can build on stablecoins with no permission - launching wallets, financial apps, or superapps without first obtaining expensive financial licenses, so long as users hold their own funds.

Very bullish on stablecoins’ potential, Nic compares them to Starlink:

“Just as Starlink brings billions of people online for the first time, stablecoins bring billions into the dollar economy for the first time. The economic impact of both will be measured in the trillions. In fact, they’ll work in tandem—billions of individuals will soon be able to participate in the modern online economy and get paid efficiently, without relying on legacy infrastructure.”

Thanks for reading,

Coco