A stablecoin is a type of cryptocurrency designed to maintain a price equal (or pegged) to another asset, such as a fiat currency. Stablecoins exist on a blockchain and may benefit from their on-chain nature by allowing payments that are faster, more secure, and more transparent than traditional payment platforms, all while reducing transaction fees and providing access to individuals without access to traditional banking.

Stablecoins are not new to the market, but up until now there have some been constraints on their utility resulting from a lack of regulatory clarity. But with the coming of the new administration, proposed stablecoin legislation, and a host of new developments in the digital assets space, stablecoins are primed for growth.

Given Dentons’ prior work in this space and a recent opportunity that Dentons lawyers had to speak with a number of market participants—including those in traditional finance and DeFi at an industry event—here is our take on the current pulse of the stablecoin market.

• Market participants believe that long-needed regulatory clarity is imminent—which we expect will set off an explosive growth in adoption and utility.

There are three stablecoin bills currently pending in the U.S. Congress: two in the House of Representatives, and one in the Senate. All three bills are substantively similar and aim to provide a roadmap for market participants wishing to engage in the space. For example, the GENIUS (Guiding and Establishing National Innovation in U.S. Stablecoins) Act was introduced earlier this month by Senator Bill Hagerty (R-TN). The GENIUS Act seeks to regulate the U.S. stablecoin industry by, among other things (1) defining stablecoins as digital assets tied to the U.S. dollar; (2) amending existing legislation that would exclude stablecoins from the definition of “securities”; (3) applying the Federal Reserve's rules to issuers with assets exceeding $10 billion, and applying state regulations for those below the threshold; and (4) recognizing stablecoins’ utility for financial inclusion, streamlined transactions, and supporting the dominance of the U.S. dollar.

• Market participants believe that for the stablecoin market to flourish, trust and utility in stablecoin must continue to grow.

As to trust, the stablecoin market must (1) ensure privacy on-chain, (2) allow users to prove their identity, and (3) build or permit building on-chain products in compliance with applicable regulations.

As to utility, the use cases and adoption for stablecoins continues to grow by day, beyond just traditional payments, but this must continue if stablecoins are to achieve widespread adoption.

Our Takeaways

While the U.S. is playing catch up to other jurisdictions (such as the European Union’s already implemented Markets in Cryto Assets (“MiCA”) regulation), establishing a clear, comprehensive U.S. regulatory framework will unlock the U.S. stablecoin market and encourage adoption of dollar-based stablecoins in the trillion-dollar payments industry.

Nonetheless, significant legal questions surrounding stablecoins are still likely to exist, including what the final law(s) will look like. Moreover, more nuanced issues may not be resolved by legislation, such as, relating to custodial location and conflicts between interstate regulation, or if non-U.S. issuers want to issue a U.S. dollar-based coin. In short, market participants should keep such legal considerations, among others, in mind as we usher in a new dawn.