Stablecoins, digital assets pegged to a commodity or currency, are all the rage this year. They offer the potential to harness some of the attractive characteristics of cryptocurrencies without the volatility. Recently, U.S. Treasury Secretary Scott Bessent said he could see the stablecoin market expanding from about $200 billion now to over $2 trillion one day.
One of the largest stablecoins in the world is USDC (USDC 0.01%), which is backed 1-for-1 by the U.S. dollar and now has a market cap of roughly $64 billion (as of July 29). It's issued by Circle, one of the high-flying initial public offerings this year. Investors should understand that the goal of USDC is to track the dollar and trade at $1, so it's not an investable asset, but more of an actual currency.
Although USDC will likely continue to benefit from the stablecoin revolution, it still has a long way to go. Here are three key headwinds facing USDC.
CRYPTO: USDC
Key Data Points
1. Plenty of competition
Whenever there is innovation in the financial world, there are going to be many that want to get involved. USDC faces competition from other stablecoin issuers like Tether, which had a market cap of over $164 billion, as of this writing.
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Ripple, the company behind XRP, has also launched its own stablecoin called RLUSD. Paypal has its own stablecoin backed 1-for-1 by the U.S. dollar that can be used on the company's website or app. Users can also earn annual rewards equivalent to 4% when they use Paypal's stablecoin on the platform.
This is just the beginning, of course. Passage of the Genius Act is going to make it easier for more traditional financial institutions to get involved in crypto custody and stablecoin issuance, and many of the large money center banks are already considering it. The largest payment companies in the world like Visa and Mastercard could also get involved. Visa Chief Executive Officer Ryan McInerney said on CNBC that the company would "enable and scale stablecoins if consumers want them."
2. Consumer adoption
There are many potential advantages of stablecoins, including faster settlement and lower fees through the ability to cut out intermediaries. But that doesn't mean consumers will start using USDC for everyday purchases.
Think about Bitcoin: The price has hit levels few could have imagined a few years ago but it doesn't seem like people are frequently using Bitcoin at grocery and convenient stores, even if it is an option. According to consulting firm McKinsey, while stablecoin payments have grown significantly in recent years, they still only make up less than 1% of daily money transfers globally.
There are also other things consumers may have to get used to. Although the Genius Act will require stablecoin issuers to abide by the Bank Secrecy Act (BSA), one of the advantages to longer settlement times is that it gives consumers and payments companies a better chance of detecting fraud or reversing a payment. Stablecoin issuers can freeze, block, or reissue tokens but it's going to take some time for consumers to get used to, and near-instant settlement could pose challenges in terms of detecting fraud.
3. The Genius Act doesn't solve everything
The Genius Act is viewed as monumental legislation because it will create a framework to regulate stablecoins, providing banks and large companies the go-ahead to work on and experiment with stablecoins without fear of regulatory enforcement. But we still don't know what stablecoin legislation will look like, and the devil is always in the details.
After Congress passed the Genius Act, the White House put out a fact sheet on the bill that provides some information on what the framework will actually do. For instance, stablecoins will need to be backed by 100% liquid assets, abide by the BSA, establish effective anti-money laundering (AML) protocols, and protect consumers. But these requirements are easier said than done.
According to Thomas Kingsley, director of Financial Services Policy at the American Action Forum, some aspects of BSA and AML might be difficult to apply to stablecoins because they are so different from fiat currencies and the traditional banking system. Now, that doesn't mean there aren't solutions, but it's not exactly a simple conversion.
The Bank of International Settlements also pointed out that stablecoins can trade at varying exchange rates to par against the dollar, and don't always trade exactly at $1, which could create instability. It reminds Barry Eichengreen, an expert on the history of the international monetary system, of some of the issues the U.S. banking system faced in the 19th century when there was no federal oversight and banks issued bank notes with questionable and often unreliable backing.
