According to global ratings firm S&P Global Ratings, a new bill focused on stablecoins introduced to the United States Senate has the potential to incentivize U.S. banks to enter the stablecoin market.
S&P Global Ratings asserted in the report on Wednesday that the regulatory clarity in the United States has the potential to inspire traditional financial institutions to venture into the stablecoin market and could diminish the dominance of Tether’s USDT.
Stablecoin Regulation Threatens Tether’s Dominance and Paves Way for U.S. Bank-Backed Alternatives
In an April 17 announcement, two U.S. Senators, Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY), introduced the Lummis-Gillibrand Payment Stablecoin Act, a bill the lawmakers had been drafting for months and expected to make public in 2024. According to S&P, it could incentivize banks to engage in the stablecoin market.
I’m proud to join @SenLummis to introduce the Payment Stablecoin Act.
Passing a regulatory framework for stablecoins is critical to protecting consumers, promoting responsible innovation, and cracking down on money laundering and illicit finance. https://t.co/UP9pk0uQkt pic.twitter.com/lIqA3rwQXN
— Sen. Kirsten Gillibrand (@gillibrandny) April 17, 2024
However, the proposed bill would not permit Tether, a non-U.S.-based stablecoin, potentially decreasing demand for it. In a research note dated April 23, S&P Global Ratings shared insights on the Payment Stablecoin Act, which was presented to the Senate on April 17.
The rating agency described stablecoins as a potential “key pillar of financial markets” and pointed to BlackRock’s recent launch of the BUIDL fund as evidence of the efficiencies and enhanced settlement security offered by stablecoins in tokenizing assets and digital bonds.
S&P Global Ratings noted that the approval of the stablecoin bill could accelerate institutional blockchain innovation, particularly in tokenization or digital bond issuances involving on-chain payments. This growth in institutional use cases for stablecoins could create opportunities for banks as stablecoin issuers and diminish Tether’s dominance in the global stablecoin market.
If passed, the bill would require stablecoin issuers to maintain one-to-one cash or cash-equivalent reserves to back their tokens and prohibit the use of algorithmic stablecoins for illicit purposes such as money laundering.
Additionally, S&P Global Ratings highlighted that the proposed $10 billion issuance limit on non-bank firms could pose challenges for Tether, currently the largest U.S. dollar-pegged stablecoin issuer with a market cap of $110 billion. Since a non-U.S. entity issues Tether, it would not be considered a permitted payment stablecoin under the proposed legislation.
S&P Global noted,
“If the bill is approved, and relevant banking regulation follows, the new rules may provide banks with a competitive advantage by constraining institutions without a banking license to a maximum issuance of $10 billion.”
U.S. Stablecoin Bill Could Disrupt Tether, Boost Domestic Alternatives
As a consequence, U.S. entities would be unable to hold or transact in Tether, potentially reducing demand for the stablecoin while boosting those issued by U.S. entities.
S&P Global further observed that much of Tether’s transaction activity occurs outside of the United States, driven primarily by transactions in emerging markets, retail activity, and remittances.
Furthermore, the report suggested that the Securities and Exchange Commission’s removal of the requirement for custodians to report digital assets on their balance sheets could lead to the emergence of new providers of digital asset custody services, fostering greater competition in the market.
S&P Global Ratings had previously criticized USDT for its perceived shortcomings compared to its rivals in fulfilling its primary function of maintaining a stable value at $1.
The bill’s development comes amidst concerns about stablecoins, particularly regarding their potential use in illicit activities. Senator Lummis has previously called for the Justice Department to investigate stablecoin issuer Tether for allegedly facilitating funds for the terrorist group Hamas.
Senator Sherrod Brown (D-OH), chair of the Senate Banking Committee, has also expressed interest in stablecoin legislation. He recently indicated that he is open to advancing stablecoin legislation in a package with a bill to allow banks to do business with marijuana businesses and other measures. The House is also working on a version of its stablecoin bill.
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