What Are Stablecoins? And How do they Fit into New Crypto Policy?

If you’re following tech trends in finance, then you’ve probably heard the term “stablecoins” get thrown around. We’ve previously written about the administration’s push to see crypto become more widely adopted in traditional banking, and stablecoins are a major part of that push. What exactly are stablecoins, and how do they differ from conventional cryptocurrency? A new Arnold & Porter memo examines what these digital assets are and how they function:

“Stablecoins are digital assets that are designed to maintain a stable value through backing by another asset or some other stabilizing feature. Put another way, stablecoins are assets that live on the blockchain and are designed with certain features that are meant to keep their value steady through good conditions and bad. They seek to serve as a tokenized form of currency that is programmable and capable of benefiting from all the other attributes of distributed ledger technology (DLT). And, because of DLT, stablecoins may be settled instantaneously.”

Stablecoins are the crypto industry’s answer to volatility. Stablecoins are attempting to provide a less volatile digital asset by backing their value with more stable assets like fiat currency. They are also a major component of emerging federal crypto policy. Stablecoins are specifically named in the “Strengthening American Leadership in Digital Financial Technology” Executive Order, which orders the Working Group on Digital Assets to develop a new federal regulatory framework for digital asset markets. Additionally, there are currently bills seeking to regulate certain stablecoins in both the House and Senate. However, despite their name, stablecoins carry a whole range of risks that are discussed in depth in the memo. Federal and state legislation may attempt to mitigate these risks by regulating stablecoin issuers. We’ll know more as legislation moves forward, but you likely haven’t heard the last of stablecoins.