Ingeniously profitable?

Opinion

It’s GENIUS, at least by name.

The recent passage of the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, in a rare display of bipartisan co-operation, is seen as the first major step to push cryptocurrency into the big league of global finance.

While it isn’t necessarily targeted at the most recognizable of cryptocurrencies (Bitcoin), the legislation involves the U.S. officially recognizing stablecoins, which are cryptocurrencies backed by real assets (like the U.S. dollar).

And that is largely viewed as a win for proponents of cryptocurrencies and decentralized finance overall.

“The GENIUS Act is the first step … to clarify stablecoin regulation in the U.S. to provide rules specifically for banks on how they can use these,” says Lucas Matheson, Canada chief executive officer at Coinbase, a cryptocurrency exchange.

Coinbase is optimistic about the new regulation, which might seem counterintuitive to a company involved in decentralized finance.

After all, the rise of cryptocurrencies like Bitcoin has been fuelled by the notion these stores of value bypass governments, central banks and banks.

Yet the GENIUS Act is likely the first of a raft of new regulation to include cryptocurrency in the traditional financial system.

Other pending U.S. legislation — Digital Asset Market Clarity Act — is likely to follow and it will set up a framework for oversight of digital assets, including Bitcoin.

Matheson notes other nations, including Canada, are likely to pass their own regulation.

Now, you might wonder: why is this regulation so important, especially for stablecoins?

Sophia Cote, head of policy at Shakepay, a Montreal-based cryptocurrency exchange, notes stablecoins are fiat-backed cryptocurrency — i.e. backed by the U.S. dollar — and they will result in greater financial efficiency across many areas of the economy.

Stablecoins like USDC and PYUSD — where one coin is valued at US$1 — will allow consumers to shop with these currencies with e-commerce providers, including Shopify.

Stablecoins enable “instant payouts to gig workers and global suppliers, cutting transfer times and costs,” she adds.

Anyone around the world can transact using stablecoins backed by U.S. dollars more easily, increasing access to the world’s largest reserve currency without an intermediary being involved like a bank, charging often high fees.

The U.S. government also recognizes stablecoins backed by its dollar offer an opportunity to finance its growing deficits more easily.

Even before the legislation, Tether — among the most popular U.S.-backed stablecoins — was growing rapidly.

Issued by Tether Limited Inc. in Cayman Islands, it “is the seventh-largest buyer of U.S. treasuries in the world,” says Elliot Johnson, chief investment officer at Evolve ETFs in Toronto.

“That puts it on par with the U.K. for buying U.S. treasuries.”

As large institutional investors — like the Chinese government — become more leery of investing in U.S. debt, stablecoins offer new customers for its treasuries. These are consumers in nations where the U.S. dollar is the currency of choice.

“It’s not Canadians buying Tether,” Johnson says, noting Canadians have confidence in their nation’s money. “It’s people in Turkey and Venezuela and other emerging markets.”

Through exchanges like Coinbase and Shakepay, consumers can buy stablecoins through their mobile phones and send money to family, for example, in other countries at very low cost compared with traditional money transfers. Then, those receiving the stablecoin can essentially transact with U.S. dollars digitally versus using their unstable, local currencies, which are often declining in value.

For investors, the GENIUS Act is also seen as a boon.

“Once you have a digital dollar, your ability to buy other digital assets like Bitcoin is very simple,” Johnson says.

Already, the price of Bitcoin in U.S. dollars has hit all-time highs in recent weeks as investors see the GENIUS Act as the first step toward more people owning Bitcoin.

Given only 21 million Bitcoins can ever exist, more buyers inevitably will push up the price of this asset. It’s the main reason why many investors call Bitcoin “digital gold.”

Like the real commodity, it’s a store of value, and there is only so much of it. As more people want it, its price inevitably rises. Its value earlier this week sat around US$115,000 (it was once worth less than US$1) and some predict it could reach US$1 million in 10 years.

Other notable cryptocurrencies are likely to see a boost as stablecoins will bolster the use for blockchain — the highly secure digital ledger system that allows Bitcoin and other cryptocurrencies to transact, be accounted for and valued instantly. The most notable cryptocurrencies are Ether and Sol, used by the Ethereum and Solana blockchain networks, respectively, to facilitate transactions of smart contracts.

From an investor point of view, the Ether and Sol cryptocurrencies “are like buying a share in the internet in 1993,” Johnson says. Cryptocurrencies and blockchain are likely to be revolutionary, but it’s too early to grasp exactly how, he adds.

Generally speaking, however, large networks like these often turn out to be incredibly valuable. Consider Meta (Facebook), Johnson adds. “The value of its network is a result of almost everybody being connected to everybody else.”

Simply, as more people use decentralized finance networks, the more valuable the cryptocurrencies that support them will become.

At least, that’s the theory. Then again, who knows what the future might hold?

Joel Schlesinger is a Winnipeg-based freelance journalist

joelschles@gmail.com