Stablecoins: Tying Cryptocurrencies to Other Assets

Stablecoins: Tying Cryptocurrencies to Other Assets

Todd Deger

Associate Editor

Loyola University Chicago School of Law, JD 2023

Cryptocurrency has an air of mystery about it. It seemingly burst onto the scene a decade ago, and while some of the stories about it may seem outlandish, many of them are true. The first known Bitcoin purchase was for two pizzas and prices can fluctuate wildly based off of tweets. With the origins of such a thing being the subject of internet humor and its value being so volatile, what level of attention and care is due to it?

Current regulation in the United States

Presently, multiple U.S. departments and agencies are keeping a watchful eye on cryptocurrencies. This includes the Securities and Exchange Commission (SEC), the Department of the Treasury, the Internal Revenue Service (IRS), and the Commodity Futures Trading Commission. Overall, however, there is only a small amount of actual financial regulation occurring.

The Chairman of the SEC, Gary Gensler, has admitted that crypto is a “highly speculative asset.” That being said, the SEC has no current plans to ban cryptocurrency and thus digital assets need to be addressed in public policy frameworks. Gensler believes that increased regulations may be necessary  to protect the ever-growing number of people who are actively investing in cryptocurrency. One measure that the SEC has taken is approving the ProShares Bitcoin Strategy ETF, which trades as BITO. BITO is a creative way of safely investing in Bitcoin without buying actual Bitcoins because it is a Bitcoin futures exchange-traded fund. This allows people to engage in the Bitcoin market without the need to navigate the complex means of actually acquiring even a portion of a single Bitcoin.

The Department of the Treasury has proposed a different solution to the volatility of Bitcoin. Stablecoins are an alternative to traditional cryptocurrency. They are a class of cryptocurrency that have their value tied to another asset. These “other assets” cover a range of investable things from the U.S. dollar to commodities in the marketplace. Tether is one such stablecoin that maintains stability through a very simple method. For every Tether currently in circulation, there is a dollar in Tether’s bank account to back it up. If dollars can be said to have operated on the gold standard, Tether now operates on the dollar standard.

Following habit, the IRS has labeled virtual currency as property for tax purposes. Thus, cryptocurrencies are taxable as income and taxpayers must report the fair value of the digital currency in U.S. dollars when filing taxes each year.

The Commodity Futures Trading Commission has taken one of the strongest stances on what exactly we should consider cryptocurrency by stating that Bitcoin and Tether are considered commodities. The Commission has noted that new technologies have the potential to transform the markets it currently regulates, especially as the popularity of these assets rise.

The Biden administration and stablecoins

Treasury Secretary Janet Yellen has said on stablecoins that “the absence of appropriate oversight presents risks to users and the broader system.” In a report by the President’s Working Group on Financial Markets, Yellen proposes regulatory legislation that would bring stablecoins into a similar regulatory environment as banks.

While basic cryptocurrencies like Bitcoin or Ether may remain esoteric and mysterious, experts say that cryptocurrencies like stablecoins currently hold the most potential for the everyday consumer. With the idea in mind that Americans may well be making purchases using purely digital currencies in the future, stablecoins are the safer alternative to the volatile currencies used to buy pizzas in 2010 and pieces of art featuring cartoon apes in 2022 (NFTs).

Cryptocurrencies are new and strange. Their values seem to be based on the thoughts and feelings of the ultrarich. Investors do not necessarily trust them because of their high volatility. While these things are also true of stablecoins, there is increasing trust and regulation appearing for them. Their nature of being tied to another asset that exists in either the physical or digital world gives them a buffer between Elon Musk’s tweets and brings them closer to the way a bank operates. The closer a cryptocurrency is to the stability of non-digital currency, the more trust people can place in it, meaning they will be willing to use it in the national and global markets.

The United States and the rest of the world are moving towards a new global economy. The range of possibilities and potential uses for cryptocurrency is all the more reason to proceed with caution and intention. Hopefully, the Biden administration and Treasury Secretary Yellen continue their interest in stablecoins and the middle ground that they offer between traditional currency and the fresh-out-of-the-can cryptocurrencies.