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EXPERT COMMENT

The GENIUS Act means that, for good or ill, stablecoins are here to stay. Their ability to facilitate capital flows in and out of emerging economies presents a mixed bag for policymakers.

Plenty of people have been celebrating last month’s passage of the GENIUS Act, which will regulate the US market for stablecoins. These are digital cryptocurrencies traded on blockchain that promise to maintain a one-to-one link with respect to an off-chain asset, almost always the US dollar. A dollar-linked stablecoin, like Tether’s USDT or Circle’s USDC, is basically a digital representation of a dollar that should be exchangeable on demand for a ‘real’ one. 

Among those likely welcoming the GENIUS Act are the stablecoin issuers themselves; other financial services firms, who can envisage new revenue streams as they bolt stablecoins onto their existing set of services; and the US treasury bill market, where demand is expected to rise sharply to secure the real-world assets needed to back new digital coins.

This move is less likely to be welcomed by many central bankers in emerging economies, who have two main fears. One is that their domestic money supply will be siphoned off from deposit accounts into stablecoin wallets, making monetary policy more difficult to implement. Another, more pressing worry is that stablecoins create a new mechanism for capital flight, allowing citizens to get hold of virtual dollars at home that can be exchanged for real dollars offshore.

Click here to continue reading the full version of this Expert Comment on the Chatham House website.