Have You Heard of Stablecoin?

If you’re an investor, do you have a money market mutual fund (MMMF)? A number of 401K retirement plans offer them and they’re offered by all stock brokerage firms.

Do you know how an MMMF works? My friend Grok says “A money market mutual fund is a type of mutual fund that invests in short-term, low-risk debt securities, aiming to provide investors with a safe place to park their cash while earning a modest return. Think of it as a basket of highly liquid, stable investments that prioritize preserving your money over chasing big gains.”

A key attribute of MMMFs is that they maintain a value of a certain amount, usually $1.00. As the value of the invested securities changes, securities are purchased or sold to maintain the fixed value of the fund.

Now, with the advent of cryptocurrencies like Bitcoin, there is a new MMMF-like investment opportunity: Stablecoin.

Here’s how Investopedia defines Stablecoin:

Stablecoins are a special type of cryptocurrency designed to have a constant value over time (like MMMFs), rather than fluctuating wildly like many other cryptos. They achieve this by tying their value to another more stable asset, like the U.S. dollar. Their goal to offer all the benefits of crypto while attempting to avoid crypto’s volatility.

Cryptocurrencies use blockchain technology. Curious about how blockchain works? See the explanation at the end of this article.

Stablecoins can be backed by various assets like securities, gold or silver, other cryptocurrencies like Bitcoin or even nothing. The Stablecoins backed by securities may pay a yield based upon their investments.

For example, USD Coin (USDC) is a collateralized Stablecoin. The graph below shows USDC’s collateral reserves as of August 2022—at $54 billion, the coin’s reserves are slightly greater than its liabilities of $US53.8 billion.

USDC’s reserves are held in safe assets like cash and US Treasuries.

So, why use Stablecoins? Because they are not denominated in any country’s currency, Stablecoins are universal. For example, this universality is beneficial for international bank transfers. A currency transactions like this would require foreign exchange conversions using multiple banks and intermediaries. This route would then involve a series of steps and various fees and often take a few business days to complete, as opposed to a Stablecoin transfer which would be instant and come with low, or zero fees.

These lower fees will have the effect of lowering transaction costs, especially in developing nations.

It's not just international transactions that will benefit. The network fees charged to process Stablecoin transactions are much lower than those of credit cards like Visa and MasterCard. For example:

Stablecoin fees vs. legacy payment processing solutions. Source: Simon Taylor

Ok, so why should you care about Stablecoins? You may be hearing a lot about them in the future.

Presently the U.S. Senate is considering the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act. (The House has a similar bill, the STABLE Act.)

The GENIUS Act will serve to provide a regulatory framework that will tame the “wild west” aspect of cryptocurrencies. It includes regulatory oversight, consumer protections and other considerations. This will have the effect of legitimatizing Stablecoins. For example, Bank of America CEO Brian Moynihan told an audience at the Economic Club of Washington DC that the bank may enter the Stablecoin business — likely launching its own dollar-pegged Stablecoin.

Promoting Stablecoin is good for the U.S. Collateralized Stablecoin issuers are collectively the 18th largest buyers of U.S. government debt in the world — putting these firms ahead of countries like Germany and South Korea.

By adopting pro-Stablecoin policies and promoting Stablecoin usage worldwide, the U.S. government can help make Stablecoin a readily accepted and universal payment medium. Theoretically this will make the transactions we make cheaper, faster and easier.

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About Blockchain

I asked my friend Grok to explain how blockchain works in layman’s terms. This is a shortened version of what I got:

“Imagine blockchain as a digital notebook that’s shared across a bunch of computers, where every page gets filled with records and once a page is full, it’s locked and linked to the next one. It’s a way to keep track of things (like money, contracts, or data) without needing a middleman, like a bank, to oversee it. Here’s how it works in simple terms:

1. The Basics: Think of a blockchain as a chain of blocks. Each “block” is like a page in that notebook, and it holds a list of transactions or information—say, “Alice sent Bob $10” or “Charlie bought a car.”

2. Everyone Gets a Copy: Instead of one person keeping the notebook, it’s shared with a network of computers. Every time something new happens—like Alice sending Bob that $10—everyone’s copy gets updated. No single person controls it; it’s decentralized.

3. Adding a Block: When a new block is full of transactions, it’s checked by the network. Computers use math puzzles (called cryptography) to agree that everything’s legit—nobody’s cheating or faking stuff. Once approved, the block gets added to the chain with a unique code, kind of like a fingerprint. If someone tries to change an old block—say, to steal Bob’s $10—the fingerprint won’t match anymore, and the whole network will notice. This makes it super hard to mess with the past.

4. No Middleman Needed: Because everyone has the same notebook and the system double-checks itself, you don’t need a bank or a company to trust the process. It’s like a group of friends agreeing on who paid for pizza without a cashier keeping score.

“For example, with Bitcoin, the blockchain tracks every time someone sends Bitcoin to someone else. It’s public (anyone can see the notebook), but anonymous (you just see wallet codes, not names). Once the transaction is in a block and added to the chain, it’s set in stone—or at least, as close to stone as digital stuff gets.

“In short, blockchain is a tamper-proof, shared record-keeping system that runs on trust in math, not people. It’s why cryptocurrencies work, but it’s also used for things like tracking supply chains (e.g., where your coffee beans came from) or securing contracts. Simple idea, clever execution!”