What is a stablecoin and what could it mean for your finances?
The GENIUS Act, a cryptocurrency regulation bill making its way through the Senate, has thrust a little-known type of digital asset into the spotlight.
The industry-backed measure establishes rules targeting stablecoins, a form of cryptocurrency pegged to the value of another asset, often the U.S. dollar.
If enacted, the bill could allow such crypto coins to become a mainstream tool for digital payments and investments, proponents say. Critics warn that wider adoption of stablecoins may endanger consumers and the broader economy.
Here's what to know about stablecoins and how they could impact your finances:
What are stablecoins?
Stablecoins are a type of digital currency backed by another form of currency, like the U.S. dollar or a commodity like gold.
Typically, the issuer of a stablecoin holds at least one unit of reserve currency for every stablecoin. A stablecoin pegged to the U.S. dollar, for instance, is backed by a reserve of dollars that matches the number of coins.
Stablecoins are designed to be less volatile than other forms of cryptocurrency, which experience large price swings in part because digital assets lack inherent value.
Cryptocurrencies – including popular coins like bitcoin and ether – can be highly sensitive to news developments or investor behavior. In turn, such digital currencies pose difficulty for individuals trying to conduct a purchase or sale using digital assets.
"Most crypto assets have nothing behind them – they're literally annotations on a database or spreadsheet," Hilary Allen, a law professor at American University who examines stablecoin policy, told ABC News. "Stablecoins have reserve assets linked to the annotations in the database."
As their name suggests, stablecoins "evolved as a way of keeping a more stable price for crypto assets," Allen said.
What do stablecoins mean for your finances?
For now, stablecoins function primarily as a tool for crypto investors, but wider adoption could pave the way for their use as a form of digital payment in everyday purchases, some experts said.
Stablecoins offer crypto investors a place to store their profits without converting the gains into fiat currency.
Once a crypto trader finds a new digital asset deemed worthy of investment, the stablecoins can be used to acquire that target cryptocurrency. When the trader wants out of the new investment, he or she can cash out for more stablecoins.
In other words, Allen said, stablecoins amount to a "cash-management tool."
Some stablecoins offer annual yields for investors, meaning the digital assets also function as liquid assets with stable upside akin to money-market mutual funds, some experts said.
In theory, both dollar-pegged stablecoins and money-market funds can be exchanged for a dollar at any time. That flexibility allows asset holders to earn small gains while retaining the capacity to sell off the asset at any time.
A potential integration of stablecoins into conventional finance could allow them to be used in a manner similar to app- or debit card-based payments, some experts said.
"You wouldn't need to physically transfer bills," said Steven Schwarz, a law professor at Duke University who studies stablecoins, who noted the crypto coins could have particular value for cross-border transactions.
"The holy grail would be to find a so-called 'global stablecoin' – one that everyone will accept internationally," Schwarz said.
What are the risks posed by stablecoins?
Critics warn that stablecoins enable illicit transactions, lack consumer safeguards, and pose a threat to the wider financial system.
The fundamental consumer risk in holding a stablecoin stems from the possibility that an issuer will squander the reserve assets used to back the crypto tokens, some experts said.
"The risk is that you may go to the issuer of the stablecoin and say, 'Please redeem my stablecoin for the underlying reference assets,'" Schwarz said. "And the issuer may be unable to redeem the stablecoin."
"The issuer may be in bankruptcy or failed to provide the assets in the first place," Schwarz added.
Wider adoption of stablecoins may coincide with participation by non-bank firms, which may result in assets that lack the protection of federal deposit insurance and the anti-fraud stipulations allowing users to redeem funds spent wrongfully or mistakenly, some experts said.
On a broad scale, such risky practices could pose a risk to the financial system, since asset holders could demand repayment from issuers unable to cover the reimbursements.
Such a scenario could trigger a government bailout or other public policy solution at the expense of taxpayers, Arthur Wilmarth, a law professor at George Washington University, told ABC News.
"These issuers could be in trouble during a crisis," Wilmarth said. "It may require a massive bailout."
Stablecoins, meanwhile, account for about 3 of every 5 illicit cryptocurrency transactions, blockchain data firm Chainalysis found in January.
"They're used for money laundering and sanctions evasion - that type of thing," Allen said.
Some critics say the risks posed by stablecoins are exemplified by conflict-of-interest concerns raised by President Donald Trump's dealings in the crypto tokens.
In March, Trump-backed crypto firm World Liberty Financial issued a stablecoin USD1. An Abu Dhabi-based investment firm earlier this month used the stablecoin to make a $2 billion investment in crypto exchange Binance, putting Trump's company in a position to profit from the deal. Trump has denied any wrongdoing.
