Leaders want to make cryptocurrencies the scapegoat while the US establishment fails financially

Politicians are railing against 'stablecoins,' or dollar-backed cryptocurrencies, and the decentralized finance they enable.

The federal government of the United States is in a precarious position these days. Inflation is rising, dissatisfaction is high, and no one knows how to fix our monetary disaster. Agents of the government will not reflect on their poor decisions and alter direction. Instead, they'll strike out at "wreckers" who they can blame for their own transgressions.

For example, some would argue that the rising price of meat at the grocery store is not the consequence of printing massive sums of money in the midst of an anti-meat "environmental" guilt campaign. According to the White House, it's the "greed of meat conglomerates."

The anti-meat craze has at least some internal logic. Meat is terrible, according to Egghead planners, and we should consume less of it. They can always transfer the blame on the manufacturers of the product they're trying to get rid of. It's a textbook win-win situation for the administration.

Flailing, on the other hand, frequently backfires. A recent Congressional hearing on a cryptocurrency technology known as a stablecoin was an example of this.

Stablecoins were assailed by Democrats on the Senate Banking Committee for a variety of reasons, ranging from the unjust to the absurd. The weirdest thing about it is that the U.S. government in particular should be welcoming the development of stablecoins right about now.

A stablecoin is based on a basic concept. It's a cryptocurrency backed one-to-one by a "stable" (get it?) asset, most often the US dollar. This allows consumers to take advantage of the advantages of blockchain transfer—quick, inexpensive, and international—without having to worry about the volatility of crypto price on a day-to-day basis. If it sounds a little like full reserve banking, that's because that's exactly what it is.

Tether (from Bitfinex), USDC (from Circle), BUSD (from Binance), and Dai are among the most popular stablecoins (a smart contract from MakerDAO on Ethereum). The first three are centralized and backed by dollars or equivalents, but Dai is decentralized and backed by digital assets like as USDC and ETH. These four companies collectively handle $140 billion in assets.

Stablecoins are generally connected to government money, which causes some cryptocurrency enthusiasts to dismiss them. Stablecoins, on the other hand, have become a vital component of both basic cryptocurrency transfer and decentralized finance, or DeFi, since they allow cryptocurrency users to quickly shift between currencies on a decentralized exchange, or DEX, without experiencing volatility.

In other words, stablecoins serve as a link between the fiat and crypto markets, benefiting both "sides." Users of cryptocurrency have a secure means to trade tokens in DeFi activities or just send money. The crypto economy provides a crucial anchor for dominant nations' state currencies, and hence their worldwide dominance. It appears that the elements of a stable (boo) equilibrium are in place.

Last week, this was not the case in the Senate chambers. The Senate Banking Committee's Twitter account promoted the hearing in the following way: "Stablecoins entrap people's money in fine print, posing a threat to the economy. We must confront the threats of stablecoin [sic] to protect Americans' money and our whole economy." Two pro-stablecoin witnesses at the hearing were also shaved off as a result of the image exhibited. The Democrats on the Senate Banking Committee did not show up.

Flailing, on the other hand, frequently backfires. A recent Congressional hearing on a cryptocurrency technology known as a stablecoin was an example of this.

Judging by the questions, chief among these systemic dangers to our entire economy is…the risk that Circle (which issues USDC) will mint physical coins that say the word dollar on them? (It's a sore subject.) Another weird line of questioning concerned how accessible stablecoins would be for people to "buy a cup of coffee at a local bodega," despite that not being the intended primary use case. Senator Elizabeth Warren darkly intoned that in this new economy, "someone can't even tell if they're dealing with a terrorist"—another sore subject.

A frequent feature of a Bitcoin hearing in Washington is these off-kilter and often amusing asides. When it comes to stablecoins, though, the policy question is simple.

Should stablecoin issuance be limited to federally regulated banks, like a Biden administration report recently recommended? Or is a more minimal and tailored regulatory framework, like the one we have for fintech firms like PayPal, more appropriate for stablecoin issuance, like Federal Reserve Board Governor Christopher Waller—who is primarily concerned with the dollar—recently supported?

The comparison to PayPal is illustrative. Stablecoins might seem especially risky because they are new and involve a blockchain, but functionally, they are not much different from how a company like PayPal operates. PayPal facilitates stable money transfer and keeps a reserve on hand to do so.

Do you have any concerns about PayPal's reserve management? Probably not, despite the fact that we don't know for sure how many "PayPal dollars" exist right now. However, we can always see how many Tethers are outstanding by looking at the public ledger.

Stablecoins are akin to PayPal, which has been operational for over two decades, yet the Senate Banking Committee wants us to believe that a similar arrangement at Tether can bring down the whole economy. It's scaremongering designed to limit your and my alternatives and opportunities.

It would assure the control and auditing that even stablecoin issuers think is beneficial if the regulations handled stablecoins similarly to how we regulate firms like PayPal. No one disputes, for example, that stablecoin issuers should handle their reserves appropriately.

The true stumbling block is the DeFi economy that stablecoins enable, not the coins themselves, which are fully regulated but might require more clarification. Senators who are anti-stablecoin frequently mention the "DeFi casino," which allows users to take out zero percent interest loans on their cryptocurrency or give out liquidity for a reasonable return. Even if DeFi isn't fully "unregulated," it does give predominantly young and outsider investors a more open way to make and keep money. For insiders who make a profession regulating what other people can do with their money, this is unacceptable. (How ironic that Sen. Warren, who has championed the fight against big banks, is now fighting one of the most important areas of free competition that threatens it.)

Nothing is perfect, including DeFi. High transaction costs cut into the value of Ethereum, causing it to lose value. There are a lot of con artists out there. There's also a fair bit of sluggishness. Users can be harmed if a smart contract is improperly constructed, just as if there was some malice involved. These are serious issues, but they aren't best remedied by outright destroying the sector, as many in Washington would want to do.

Because the US system has failed to "guard American savings" and avert "dangers to our whole economy," people are turning to DeFi and the stablecoins that support it. As a result, politicians will lash out at these escape routes, blaming them for the issues that their own activities have created.

The beauty of bitcoin is that it is difficult for governments to prohibit it. They can make it more difficult to access, and they can threaten or control third-party bitcoin service providers.

The unanswered question of how decentralized many bitcoin services and even protocols are is one major risk in the DeFi environment. The majority of DeFi is based on a smart contracting system such as Ethereum or a "Ethereum-killer" such as Solana or Avalanche that works similarly.

Some constraints are triggered based on whether something is sufficiently decentralized, although even here there is more freedom than many people assume. However, let us not be naive. Satoshi Nakamoto kept his identity a secret because he didn't want to be manipulated by the authorities (or worse). The creator of Ethereum, on the other hand, is very identifiable, and has organized a chain rollback before.

Even if the government were able to clamp down on custom built smart contract platform-based DeFi, that would not kill DeFi. A new wave of DeFi functionality is currently being ported on the Bitcoin blockchain with projects like Sovryn, which is run on a sidechain, and Atomic Finance, which would be totally on chain. These wouldn't necessarily require stablecoins, either.

Many in the government appear to be having a difficult time admitting the presence of something they can't completely control, assuming they even comprehend it. Stablecoins give the government the option to develop a light-touch regulatory system similar to the one in place for existing fintech businesses, while also bolstering the dollar in the crypto economy.

However, the threat of DeFi will most likely scare them away from engaging in this degree of realpolitik. It will be all too tempting to stifle stablecoins in order to put a stop to DeFi, which would give the government the worst of all worlds while also cutting out many individuals from financial potential.

Because of their recognizable leadership, Ethereum- and competitor-based DeFi may be simpler to manage, and current stablecoins may be herded due to their relationship to the conventional financial system. However, same strategies may be applied to bitcoin, which is far more difficult to govern on its own. These programs will continue to exist, although in a far more limited form, but the government may use its flailing for control to pull down the people who need it the most.

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