Stablecoin 101: Our Crypto Expert Explains Washington's Latest Move

I’ve known Dave Zeiler for years. He’s a friend, longtime colleague, technology expert and former crypto miner. Dave spent decades as a reporter, with a focus on tech — which introduced him to crypto. In 2011, he established his own Bitcoin-mining venture — back when individuals could still do that — and ultimately became a nationally known chronicler of all things crypto.

Back in March 2024, in the “Bitcoin Guide” he did for the folks here at Stock Picker’s Corner (SPC), Dave made this short-but-powerfully-prophetic statement:

Dave was right.

Again.

As he has been with his “Crypto Calls” ever sincere first forayed into Bitcoin 14 years ago.

So when the SPC team wanted to create an overview of “stablecoins” — and explain the new Washington legislation that would accelerate their creation and (it’s hoped) their safety — we knew that Dave was the right expert to do it for you.

Check out Dave’s analysis, which follows below …

One of many signs that cryptocurrencies have achieved mainstream status is that the U.S. Senate is considering a bill that would regulate stablecoins.

Unlike cryptos like Bitcoin and Ethereum, stablecoins do not fluctuate in value. In fact, their mission is to maintain a price firmly pegged to a fiat currency like the U.S. dollar. (According to Deutsche Bank $DB ( ▼ 0.42% ), 83% of all stablecoins are denominated in U.S. dollars.)

The bill in the Senate is called the GENIUS Act (Guiding and Establishing National Innovation for U.S. Stablecoins— S. 1582). It seeks to establish some basic regulations for stablecoins. The bill took a major step forward May 19 when it advanced on a procedural vote, 66-32.

If you’re not yet familiar with the world of cryptocurrencies, the whole idea of stablecoins might seem odd. That the Senate deems them worthy of legislation might seem even more odd.

But when you know more about stablecoins it does make sense. I’m here to answer your questions and explain what’s going on.

Question 1: What Are Stablecoins?

As I said a moment ago, the goal of a stablecoin is to hold a value fixed to a fiat currency such as the U.S. dollar or the euro. If you happen to own shares of a money market fund, the concept is similar.

But stablecoin issuers don’t all use the same approach to maintaining their peg:

• Fiat-collateralized: With this method, the stablecoin issuer holds one unit of the fiat currency (at a bank or some other account) for every unit of the stablecoin they create. The units can be in the actual currency or an equivalent such as secured funds, corporate bonds, commercial paper, and loans. This is the method used by USDC and Tether (USDT) are the two biggest stablecoins.

• Commodity-backed: This type of stablecoin is backed by a commodity, usually gold, and typically is tied to the price of that commodity. Examples include PAX Gold (PAXG) and Tether Gold (XAUT).

• Crypto-backed: In this case, the issuer collateralizes the stablecoin with another cryptocurrency or basket of cryptos. Because crypto prices are notoriously volatile, these types of stablecoins tend to be heavily over-collateralized, sometimes as much as 2-to-1. The stablecoin is then engineered to use that flexibility to maintain its peg to the target fiat currency. MakerDAO’s Dai (DAI) uses this method.

• Non-Collateralized (Algorithmic): This method uses an algorithm to mimic the actions of a central bank in maintaining a peg to the target currency. In other words, tokens are either created or destroyed to keep the value stable. But algorithmic stablecoins are prone to losing their pegs during wild market swings when the algorithm can’t react quickly enough. That means it’s the riskiest of the four. The challenges of maintaining the peg using this method have resulted in several failures, most spectacularly that of TerraUSD (USTC) in May 2022. In a matter of weeks its peg went from $1 to one cent, setting off a chain of events that led to the bankruptcies of multiple crypto companies and wiping out tens of billions of dollars of customer wealth.

According to CoinGecko, the total value of all stablecoins is about $249 billion, approximately 7% of the $3.45 trillion total value of all cryptocurrencies.

Question 2: Why Do Stablecoins Exist?

Your first reaction — when learning of stablecoins — is probably: “What’s the point?”

But in the world of crypto trading, stablecoins play a vital role.

That’s because stablecoins serve as a “proxy” for fiat currencies on crypto exchanges. This was especially important in the early years of crypto trading, when getting fiat money into or out of any exchange was slow and difficult. The very first stablecoin, Tether, was created in 2014 to solve that problem.

While it’s easier to buy crypto with dollars and other fiat currencies today, it’s still not easy to move fiat money around the crypto universe. Being native to crypto, stablecoins can move around much more easily, from wallet to wallet or from one exchange to another.

And while it’s relatively easy to buy such big-name cryptos as Bitcoin and Ethereum with fiat money directly, less-popular coins typically can only be bought on an exchange with another cryptocurrency. These “trading pairs” — a stablecoin with another crypto — are especially useful.

Stablecoins also play multiple roles in the world of DeFi (decentralized finance). Common uses include lending and borrowing on decentralized platforms — and providing liquidity to decentralized crypto exchanges.

Finally, several big banks – including Wells Fargo $WFC ( ▼ 1.23% ), Citigroup $C ( ▼ 0.19% ) , Bank of America $BAC ( ▼ 0.25% ) , and JPMorgan Chase $JPM ( ▲ 0.03% )  — are studying stablecoins as a way to make money transfers faster and cheaper – particularly with cross-border payments.

Question 3: How Stablecoins Make Money

You might wonder why a company like Tether or Circle (the issuer of USDC) would even bother to create a stablecoin.

But operating a stablecoin can be surprisingly lucrative.

Tether, which accounts for about 61% of stablecoin market, reported a profit of $13 billion in 2024.

Circle, with about 25% of the market, earned $1.7 billion in 2024. (And on Tuesday, Circle filed to go public on the New York Stock Exchange in a deal with an estimated value of $6.7 billion. The stock would trade under the ticker “CRCL,” though no time frame was given.)

Primary sources of income include:

• Generating interest on the reserves that back their stablecoins. Some of the interest comes from bank deposits, some comes from interest on low-risk investments like U.S. Treasury bills and commercial paper.

• Transaction fees on withdrawals and deposits.

• Lending activities.

Question 4: What Does the Senate’s Bill Actually Do?

The GENIUS Act lays out some basic guidelines for stablecoin issuers. Some highlights:

• The bill gives several existing federal institutions — including the FDIC, the U.S. Treasury Department, the Office of the Comptroller of the Currency (OCC) and the U.S. Federal Reserve — roles in the oversight of stablecoin issuers.

• Only approved entities will be allowed to issue stablecoins. These include banks regulated by a federal banking agency; non-banks regulated by the OCC; and state-qualified issuers that must comply with the federal standards. Issuers with more than $10 billion in market capitalization do not have the option of state-based regulation, although (as of now) only Tether and USDC have market caps above that threshold.

• The bill requires issuers to back their stablecoins 1:1 with reserves in U.S. dollars or other high-quality liquid assets, such as U.S. Treasuries. In addition, issuers must have mechanisms in place to maintain the peg to the U.S. dollar.

• Issuers must publish the monthly composition of their reserves on their websites.

• Rehypothecation of reserves is prohibited. (Here we’re referring to situations where banks or brokerages re-use collateral posted by their clients/customers to secure their own transactions.)

• Issuers must meet capital and liquidity requirements as set by federal regulators

• Issuers that provide custody services must segregate customer assets and take steps to protect such assets from hackers. In other words, so-called “commingling” of customer assets with company assets is prohibited.

• The bill clarifies that stablecoins are not securities.

Question 5: What Are the “Pros” of the GENIUS Act?

The sponsors of the Senate bill say it will bolster national security by regulating stablecoin issuers and by giving regulators the tools to go after violators. They also say it strengthens the U.S. dollar by “increasing demand for U.S. Treasuries and expanding dollarization.”

Crypto evangelists say the legislation brings long-overdue regulation to at least one corner of the crypto world. In doing so, they say the bill would help legitimize the industry — unleashing innovation while making it safer for consumers to use stablecoins.

If it becomes law, the GENIUS Act would set off a flood of new issuers, including the nation’s big banks and most likely several big tech companies such as Meta Platforms $META ( ▼ 0.11% ) , operator of Facebook. Investment bank Standard Chartered PLC predicts this legislation would ignite a stablecoins surge that would boost the supply from the current $248 billion to $2 trillion by the end of 2028. That’s an eight-fold increase in a little over three years.

Finally, the arrival of regulation for stablecoins would encourage more tokenization of real-world assets. Tokenization is when an asset — such as real estate, stocks, or bonds — is represented by a digital token on a blockchain. People will be able to buy “fractions” of those assets, making ownership easier and more egalitarian.

Question 6: What Are the “Cons” of the GENIUS Act?

While the GENIUS Act has bipartisan support, a significant portion of the Democratic Party opposes it.

One big objection is the likelihood of Big Tech exploiting loopholes in the bill to create their own stablecoins. Opponents say having their own stablecoins will let them perform bank-like functions – without the protective oversight government exerts over banks. And because stablecoin use is registered on a blockchain, many worry the tech companies would track user purchases and use that data to sell ads – or even sell that data to third parties.

These same objectionists point out that when a Big Tech company did try to launch a stable coin — as Meta did with the Diem coin a few years ago — backlash from governments, central banks, and a skeptical public drove the company to shut it down.

Another concern is that the bill would not stop U.S. President Donald Trump from continuing to benefit from his family’s own stablecoin project, World Liberty Financial. Based on how the entity is structured, Reuters estimates the Trump family stands to gain about $400 million in fees.

Some critics, particularly Sen. Elizabeth Warren (D-MA), also worry that the bill’s consumer safeguards are not strong enough. Warren is among the bill’s most vocal opponents.

Question 7: So Is This Bill Good or Bad?

As with most issues, the reality is somewhere in the middle. People on both sides of the GENIUS Act make valid points.

I do find the idea of Big Tech gaining even more influence over our lives troubling. I also have little doubt that the regulations and consumer protections could be stronger.

As for President Trump’s stablecoin venture, it already violates government ethics laws. I don’t see how any further legislation could stop it.

That said, I don’t think the cons outweigh the pros of the bill. Crypto legislation is long overdue — I wrote a piece noting the need for it way back in 2014.

That this “legislation isn’t perfect” is not a good reason for it not to become law. No legislation is perfect. But you have to start somewhere.

And the bill — as it stands now — is way better than the one that was first introduced. Crypto-friendly Democrats added numerous amendments to add better oversight and consumer protections that weren’t in the original text. In the end, 16 Democrats voted for the bill, along with all but two Republicans.

Is this bill an ironclad guarantee that no shenanigans will ever happen with stablecoins?

Not by a long shot.

Regulations and oversight of our financial system do much to protect consumers. But even decades of regulation could not prevent the 2008 financial crisis.

Even if the GENIUS Act becomes law, we’ll need more crypto regulation to deal with the plethora of non-stablecoin issues. But unlike Sen. Warren, I’d rather have at least one piece of imperfect crypto regulation than none at all.

I agree with Sen. Mark Warner (D-VA), one of the Democrats who voted for the bill, who explained it this way:

“Blockchain technology is here to stay. If American lawmakers don’t shape it, others will — and not in ways that serve our interests or democratic values.”