Last week, the SEC sent shockwaves across the crypto industry as news leaked that it was charging Paxos for issuing an unregistered security in its BUSD stablecoin—an allegation that the company “categorically disagrees with.” The Securities and Exchange Commission has offered no explanation as to how BUSD, which Paxos claims to be fully backed and fully redeemable, could constitute a security. Nor has it offered any guidance to other stablecoin providers.
Stablecoins—cryptocurrencies pegged to the value of the U.S. dollar—are among the most disruptive technologies to emerge from digital finance in the last decade. But the SEC is on the warpath against them. With rumors that the federal government may now regulate stablecoins as securities, PayPal—the world’s largest online payment processor—recently put development of its own stablecoin on hold.
By embracing a blunt-instrument approach to stablecoin regulation, the SEC is flirting with a dangerous precedent that could hamper not only legitimate innovation but global dollar adoption.
That’s because stablecoins, if properly regulated, have the potential to cement U.S. financial hegemony for a generation. How? By supercharging dollarization.
Last summer, International Monetary Fund economist Eswar Prasad made a bold prediction: “It is possible that national currencies issued by their central banks…could be displaced by stablecoins.” This is already happening in real time. In inflation-ravaged countries like Zimbabwe, Turkey, and Argentina, citizens can either watch their paychecks melt away or seek refuge by converting their native currencies into dollar-backed stablecoins. It’s no surprise many opt for the latter.
Consider Latin America as a case study: the region struggles perennially with currency devaluation, with an inflation rate last year of 14.6%—one of the highest in the world. Not surprisingly, the region also has the highest rate of stablecoin adoption. According to a Mastercard study, more than a third of Latin Americans have made a purchase with private stablecoins. And in Venezuela alone, stablecoins account for 34% of all small-retail transactions.
In an unexpected twist, stablecoins are acting as the hedge against inflation that Bitcoin was supposed to be. If stablecoin adoption continues apace, it could be a trillion-dollar industry by the end of the decade. In the ultimate crypto coup, Uncle Sam could replace Satoshi as the king of digital currency.
Stablecoins have brought millions of new participants into the dollar economy. But SEC regulations could shut them out again. If the agency classifies stablecoins as securities, it will present a tremendous hurdle to global adoption—and it will do so at a critical time for U.S. dollar hegemony.
Keep in mind that the SEC’s crackdown on stablecoins is taking place at a time when a smaller percentage of global energy transactions are taking place in dollars, and the digital yuan is ascendant.
Over the last year, Xi Jinping has put increasing pressure on oil-rich leaders to settle oil contracts in yuan instead of dollars, and many of them are bending the knee. While the yuan is still years away from overthrowing the petrodollar, it is clearly coming for the crown. U.S. policymakers should be clear-eyed about China’s global ambitions—and they should recognize that the country already has a competitive advantage over the U.S. in terms of digital currency, having rolled out its own CBDC—called the e-CNY—in 2021.
Can the U.S. make up for lost ground by launching its own Central Bank Digital Currency? Even if it could, it shouldn’t. An American CBDC would present a massive invasion of privacy and would concentrate unprecedented power in the hands of central bankers.
So what does that leave us with in our competition against the digital yuan? Stablecoins.
All the more reason, then, for the SEC to get stablecoin regulation right.
The agency must see stablecoins for what they really are—not a nuisance to be dealt with but tools for projecting American economic power. With the organic growth of stablecoins worldwide, we have before us the greatest opportunity for U.S. dollar expansion since Bretton Woods.
If tech is the new oil, then let well-regulated stablecoins replace the dollar in energy transactions, and become the de facto currency of the internet. Stablecoins could act as the onramp to the dollar economy for billions across the world, ushering in a new era of U.S. financial dominance. We would be fools to forego this opportunity.
Yet fools we may be. In spite of rising tensions between the U.S. and China, the SEC has yet to grasp the bigger picture. If the agency regulates stablecoins as securities, it could kill the very innovation that could secure U.S. dollar supremacy for the next decade.
The current geopolitical situation calls for a more holistic approach to stablecoin regulation—one that seeks answers to the following questions: How can we leverage stablecoins as instruments of statecraft? How can we regulate them in a way that protects consumers but also stimulates dollarization? And how can we promote stablecoin adoption abroad to counterbalance the digital yuan?
Stablecoins are not a problem—they are an opportunity. And with the right regulation, we can seize this opportunity to empower consumers, expand American hard power, and plant our flag in the emerging digital economy.
Sam Lyman works at the intersection of policy and innovation. He is an MPP candidate at Princeton, the former chief speechwriter to Sen. Orrin G. Hatch, and the former speechwriter to the President and CEO of the U.S. Chamber of Commerce. The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
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