Two separate US stablecoin bills are currently being considered – the GENIUS Act in the Senate and the STABLE Act in the House. There’s a markup hearing on the latest GENIUS Act iteration later today. Both bills have an almost identical clause stating that the Federal Reserve and Treasury can establish reciprocal arrangements with other jurisdictions with substantially similar stablecoin regimes.
Earlier this week, Paxos CEO Charles Cascarilla testified during a House Financial Services Committee hearing about the STABLE Act. He highlighted how this reciprocity could help the United States to set high global stablecoin standards. Given that more than 99% of stablecoins are denominated in dollars, he has a point.
However, there’s an important counter argument about what reciprocity means and whether this is a biased US viewpoint.
Reciprocity for the Global Dollar
Paxos is known as the issuer of its own stablecoin USDP and PayPal’s PYUSD, which are issued out of New York, and newer stablecoins including the Global Dollar USDG issued from Singapore. The Global Dollar network is distinctive because it aims to share earnings on the reserves with distributors, including Robinhood, Nuvei, Kraken, Anchorage Digital, Galaxy, Bullish.
Hence, he wants the USDG to be usable in the United States under reciprocity arrangements. His concern is that without a timeline, these sorts of arrangements could take a long time. Mr Cascarilla highlighted in written testimony:
“We fear that products like Paxos’ Global Dollar (USDG) stablecoin, issued by a regulated affiliate in Singapore, will languish while departments and agencies make their determinations. Such delays would prevent stablecoins like USDG from being distributed and used in the United States and from operating seamlessly across borders, as intended.”
“Reciprocity is not about lowering standards—it’s about raising them globally. By establishing a framework to recognize jurisdictions with comparable regulatory regimes—covering reserve requirements, AML measures and cybersecurity protocols—the United States can prevent regulatory arbitrage, where issuers exploit lax oversight abroad. This approach fosters a race to the top, encouraging international partners to align with US standards.”
Toppling Tether’s stablecoin dominance
Circle CEO Jeremy Allaire has taken a different approach, arguing that US dollar stablecoins should be regulated in the United States. Both CEO’s are naturally self serving in their positions, and wish to topple Tether from its perch as the largest stablecoin. The battle between Circle and Tether was nicely reviewed in a recently Wall Street Journal (free link) article.
Tether recently moved its headquarters from the British Virgin Islands to El Salvador, where it has various licenses. We wondered whether the United States might justifiably recognize El Salvador for stablecoin reciprocity, given it has stablecoin regulations.
Having looked at the El Salvador legislation, that would be hard to support based on the current law. It requires 1:1 backing and a 70:30 split of assets that can be liquidated within 30 days versus longer. However, it allows a very broad range of reserve assets, some of which are volatile and resemble Tether’s. They include:
- any currency, asset or basket of assets widely circulated in local and international markets
- legal tender per El Salvador, which includes Bitcoin
- cash or cash equivalents
- debt securities considered low risk (eg. Certificates of deposits, money market funds, reverse repurchase agreements, Treasury Bills)
- gold and other commodities
- other approved stablecoins
- loans collateralized by liquid assets (cash, cash equivalents, Bitcoin)
- other investments deemed appropriate by the regulator.
What does reciprocity mean?
There’s a potential counter to the reciprocity argument. Does reciprocity mean that all US stablecoins should be free to circulate in the other country’s economy? It’s one thing to support a US dollar stablecoin for cross border payments. It’s quite another for a country to agree to its citizens using foreign currency stablecoins for domestic payments. That’s a threat to monetary sovereignty.
For example, the EU has restrictions on the scale of a foreign currency stablecoin that can circulate for everyday domestic payments.
Hence, there’s an argument that the reciprocity arrangements should emphasize cross border payments and not expect full recognition for domestic payments. Otherwise, the dollar could lose a chunk of that 99% stablecoin market share.
We’ll have to see how that plays out.
