The majority of Americans have never invested in cryptocurrency, and might not have any reason to even know what a stablecoin is. But the digital tokens are a growing force in the American financial system, and with the recent passage of the Guiding and Establishing National Innovation for U.S. Stablecoin (or GENIUS) Act, stablecoins could become a serious player in the bond market — and potentially a major economic force all on its own.
According to the Brookings Institute, payment stablecoins are digital tokens whose value is pegged to other assets, often a fiat currency. Unlike conventional cryptocurrencies like bitcoin whose value relies purely on market demand and available supply, stablecoins are designed to reliably hold their value, and are commonly used to move funds between different types of currencies.
But stablecoins haven't always been quite so reliable. According to Coindesk, the Terra cryptocurrency network collapsed in dramatic fashion in 2022 after the terraUSD stablecoin plummeted to 35 cents, dragging its sister token LUNA down to just a few cents. Terra/Luna's implosion took just five days from the first signs of distress, erased $60 billion from the cryptocurrency market, and initiated a chain reaction that led to the collapse of the fraudulent FTX exchange just a few months later.
Why was the downfall so catastrophic? Unlike many payment stablecoins, terraUSD and LUNA weren't directly backed with liquid assets and instead derived their value from algorithms. It was a revolutionary idea, but its failure wiped out untold numbers of investors and threatened the future of the entire cryptocurrency market. And the kicker: It was entirely legal.
That's about to change. The GENIUS Act establishes a long-awaited (and some say much-needed) regulatory framework to the stablecoin market. It officially labels payment stablecoin issuers as financial institutions, outlines state and federal licensing requirements, mandates compliance with the Bank Secrecy Act and Anti-Money Laundering Act, and stipulates that issuers must back their tokens one-to-one with legitimate assets. Cash and short-term treasury bills are acceptable collateral — but this time around, algorithms definitely aren't.
