Washington's think tanks and wonks turn to stablecoins, CBDCs

Stablecoins have come into vogue among DC’s policy thinkers.

Political intellectuals are turning to stablecoin policy and the topic of central bank digital currencies (CBDCs) in the US capital. The actual regulatory apparatus has been focusing closely on stablecoins for many months, with the President’s Working Group November report [link] on the subject making it a top-priority legislative item.

As a consequence of both that report and President Biden’s more recent executive order, many members of not just the regulators but the think tanks that flourish throughout DC have turned their attention to the area, though approaches to algorithmic stablecoins have been hesitant.

On May 9, Nellie Liang, who spearheaded the PWG report, moderated a panel at the Atlanta Fed’s Financial Markets Conference that focused on the outlook for central bank digital currencies, with guests from academia, think tanks and the Fed itself.

“Even stablecoins now, which are basically not regulated prudentially, are subject to BSA AML requirements at the state level,” said Liang.

One of Liang’s guests, Paul Kupiec of the American Enterprise Institute, a major think tank, hosted a panel called “Blockchain in the Beltway” just last week, which likewise focused on private stablecoins, specifically Senator Pat Toomey’s Stablecoin TRUST Act. And AEI is not alone.

Heavy hitters among think tanks have been eager to put their stamps on the cryptocurrency conversation, from Brookings to the Heritage Foundation to the Council on Foreign Relations.

Aaron Klein, a senior fellow at Brookings who wrote about the impact of Biden's cryptocurrency executive order, described the interest as "a combination of continuing long-run research into the broad field coupled with the growth of an industry that's booming."

"I'm working on plenty of aspects of it, including the rise of crypto's appeal among minority investors," Klein continued. "There's a lot of work going on at Brookings, and other think tanks but particularly Brookings, into what's going on with stablecoins."

It is part of the legislative process that high-priority items attract heavy-hitting intellectuals to the policy discussion. Some are relatively new to the crypto world but are having to get educated quickly. But others have engaged with crypto, at least tangentially, for years. 

As with the PWG report, the focus is on stablecoins that depend on fiat-based reserve assets — the most common format for the biggest stablecoins, including USDT, USDC and BUSD.

However, the overall supply of stablecoins has stagnated, and even declined since early April:

TerraUSD, the leading algorithmic stablecoin, was the notable exception to this trend. But the past two days, it has seen its peg slip, setting the stage for a new generation of regulatory proposals. The stablecoin, commonly known by the ticker UST, has since posted a recovery, and at press time is trading at roughly $0.90.

“Some kinds of private stablecoins are legitimate payments mechanisms,” Kupiec told The Block. “There are other kinds of stablecoins that I think it’s much less clear that they’re legitimate, and to me those are the algorithmic stablecoins.”

Kupiec said he did not advocate for legislation addressing algorithmic stablecoins, but others disagree.

Rohan Grey is an associate professor at Willamette University is one and a co-author of crypto-related legislation like the STABLE Act and the ECASH Act. He noted the PWG report’s “almost complete sidestepping of the issue of algorithmic stablecoins” as a problem in a May 9 tweet:

When the Biden Tsy stablecoin report came out I was pleasantly surprised on some aspects and not on others. One of the latter category was the almost complete sidestepping of the issue of algorithmic stablecoins (which the STABLE Act, by contrast *did* address).

Bad call.

— Rohan Grey (@rohangrey) May 9, 2022