- Key insight: It could take decades before stablecoins become accepted into the financial mainstream.
- What's at stake: Stablecoins are expected to reach the trillions in a few years, but safety, security and privacy concerns may hold back broad adoption.
- Expert quote: Better Markets' Amanda Fischer says stablecoins are "a solution in search of a problem."
Source: Bullets generated by AI with editorial review.
Amanda Fischer sometimes explains stablecoins to people with a riff on a late-night infomercial: "Do you love the risk of a money market fund, but hate earning money? Do you love the zero interest paid on your checking account, but hate FDIC insurance? Boy, do I have a product for you."
Fischer, who is policy director and chief operating officer at Better Markets and former chief of staff at the Securities and Exchange Commission, spoke at an event at Columbia University on Friday that was organized by Todd Baker, senior fellow at the Richman Center for Business, Law and Public Policy at Columbia Business and Law School.
Fischer was one of several speakers who pointed out the many shortcomings and hurdles stablecoin issuers need to overcome before the digital assets become widely trusted and adopted.
Stablecoin defenders at the event outlined the potential benefits of the dollar-backed digital assets, such as the possibility they can improve cross-border payments and that they can make money "programmable" by embedding instructions within the stablecoins that let them interact with processes at banks and others in the financial ecosystem.
But the consensus seemed to be that much needs to be resolved before these benefits can be realized.
Lack of a clear use case
"I have studied stablecoin for four years, and I believe it is a solution in search of a problem," Fischer said. Though the existing U.S. payment system has flaws and can be expensive, that's because of decisions that have been made about safety and security, she said.
"To the extent that stablecoins provide a solution to that, it's because they're hacking some other part of the system, not because the tech stack offers any particular benefits," Fischer said.
The idea that stablecoins could be used for payments is impractical, she said.
"No one is going to be buying stuff at the bodega with this," she said. "It is a crypto trading instrument. There's no intrinsic value in the tech that is going to lure this into a mainstream product."
Andrew Dresner, managing director of corporate strategy at Fifth Third Bank and one of the original creators of Zelle, also argued that stablecoins don't offer significant advantages domestically over established systems, except for niche use cases like smart contracts and infinite divisibility – the ability to make micropayments – which are not widely used today.
Will Peck, head of digital assets at WisdomTree, offered one use case: a recent poker game.
"When you settle up at a poker game these days, what is everyone using? It's obviously Venmo," Peck said. "No one's carrying around cash in those small enough increments." But one player at the game was Australian and did not have Venmo, so he sent stablecoins from his Coinbase account to Peck's MetaMask wallet.
"There's real value from being able to send and receive money directly to people's wallets in this sort of self sovereign way," Peck said.
Safety concerns
Fischer argued that there are only two reasons people use stablecoins. One is for crypto trading – "if you're in the crypto casino, it's super inconvenient to trade in and out of fiat," she said. The other is for illegal activity. "If you're doing crime, you don't want to trade in fiat," she said.
The blockchains on which stablecoins run are public and permissionless, said Josh Boehm, partner at Paul Hastings. This means that once a coin is issued, it can be sent to another party outside of the U.S. that is not complying with the GENIUS Act, or it can be sent to someone holding stablecoin in an unprotected hard drive.
"Those are inherently less safe and a big issue," Boehm said.
Fischer pointed out that stablecoin issuers could fail. "We've already got enough to worry about. We can't be worrying about the safety and soundness of our money," she said.
Stablecoins also face cybersecurity threats, she said. For instance, in 2021, Nevada crypto custodian Prime Trust lost the keys to digital wallets that held customers' cryptocurrency and thereby lost $80 million of customers' crypto. The next year, the Lazarus hacker group broke into gaming platform Axie Infinity and stole $615 million from players and stole $100 million of cryptocurrency from Harmony Bridge's cryptocurrency platform.
"Say what you will about the banking system, the consumer risks in crypto are greater," Fischer said.
Boehm said the largest stablecoin issuers like Coinbase are subject to "stringent expectations around BSA, AML, sanctions, and I would expect those standards and expectations to continue and be codified and expanded."
Companies that host wallets will also be given regulatory responsibilities, he reasoned.
Though crypto transactions are generally irreversible, so that when the money is gone, it's gone, "that's a feature, not a bug," Boehm said. "That's what this is intended to do. It's like you have cash. It's like you have some other form of bearer payment instrument. And when you have it, and you're choosing to use that instead of some sort of account based money, that's part of what you're signing up for."
There is still the ability for law enforcement to freeze or seize assets involved in fraud or hacking, he said.
Dresner said that it's hard to monitor parties on a blockchain "unless you have the equivalent of a walled garden where you only allow people to transact who have been essentially authorized by a trusted party."
In the banking system, banks trust each other to do know-your-customer checks, Dresner said.
"Unless we're willing to do something like that in the blockchain environment where only authorized parties are allowed on-chain, and that's how we control the bad guys don't get in, I don't see how you can stop this stuff," Dresner said.
Privacy questions
The transparency of transactions on public blockchains, even with pseudonymous addresses, raises privacy concerns. Crypto users generally don't want to think their transactions are visible.
"If [cryptocurrency firms] are in front of the FBI, they'll say they can freeze wallets and everything is traceable," Fischer said. "If they're in front of the libertarian crowd, it's free transmission of money, without Big Brother staring down your neck."
Uncertainties of speed and cost
Boehm observed that the speed of settlement of transactions on distributed ledgers varies depending on the amount of traffic they're handling.
"Most of the chains, especially the big ones that were developed early, weren't really designed for payments at scale," he said. "Network capacity can be a problem."
Users can get their transactions accelerated if they pay an expediting fee. "In Ethereum, it's called a gas fee, and that can go up depending on how congested the network is and how fast you want the payment to move," Boehm said.
Much of the cost of cross-border payments today in the fiat world is due to all the compliance the providers have to do, including BSA, AML, KYC, and sanction screening, Boehm said.
"I would imagine that if stablecoins continue to scale, and the use cases grow and the volume grows, and the perception is stablecoin is money, that whole laundry list of regulations that the fiat world has to live in, will likely be largely applied to stablecoin," he said.
Where stablecoins could be useful
The primary benefits of stablecoins are programmability and divisibility, Dresner said.
Fintechs and large banks like JPMorganChase and Citi are aiming for programmability – the ability to program stablecoins with specific instructions about where that money should go and what should happen to it.
Such smart-contract-based stablecoins "are a theoretical miracle, but not actually used a whole lot in practice, in the real world," Dresner said.
Divisibility would let stablecoins be used in very small quantities to conduct transactions between autonomous agents on the web that might need to buy services from each other in fractions of a penny, Dresner said.
"You can't do that with any conventional payment update, but you could do it with stablecoins," he said. But here again, this capability does not exist today.
"When you start going through all the features of stablecoins that make them attractive, they're just not that attractive domestically," Dresner said.
The one clear use case for stablecoins that most people seem to agree on is cross-border payments.
"They solve a lot of problems that conventional payment systems can't solve, and so I do see them doing it," Dresner said.
But he also said there are only a half-dozen banks in the U.S. that care about cross-border trade, including JPMorganChase, Bank of America, Wells Fargo, Citi, State Street and BNY.
"The other banks, including our own, just don't do a lot of cross-border activity, and when they do, they typically go through one of those six," Dresner said.
