Federal Reserve Governor Christopher J. Waller has emphasized the need for a well-defined regulatory framework to oversee stablecoins in the United States, citing their growing role in financial markets. 

Speaking at "A Very Stable Conference" in San Francisco, Waller discussed the evolution of stablecoins, their use cases, and the potential hurdles that could impede their widespread adoption.‍

The Growing Role of Stablecoins

Stablecoins, digital assets pegged to national currencies and backed by liquid reserves, have emerged as a significant player in the crypto economy. Waller highlighted their primary role as a "safe crypto store of value," allowing traders to mitigate price volatility in digital asset markets. He noted that over 80% of trading volume on major centralized crypto exchanges involves stablecoins.

Beyond trading, stablecoins are increasingly used to access and hold US dollars, particularly in regions with high inflation or limited banking services. They also present an opportunity for improving cross-border payments, reducing reliance on traditional correspondent banking networks. Waller pointed to the "stablecoin sandwich" model, where fiat currency is converted to a stablecoin for efficient international transfers before being converted back into local currency.‍

Challenges to Stablecoin Adoption

Despite their potential, Waller acknowledged several challenges that stablecoins must overcome to achieve mainstream adoption. A key obstacle is the lack of a clear regulatory framework in the United States. 

Unlike banks, stablecoin issuers face unique risks, such as potential "depegging" events and payment system failures. He stressed the importance of establishing a proportionate regulatory regime that ensures stability without stifling innovation.

Waller also raised concerns about market fragmentation, both in terms of blockchain interoperability and regulatory inconsistencies. Different stablecoins operate on separate blockchains, creating inefficiencies in cross-chain transactions. 

Regulatory disparities, particularly between state and federal authorities in the US and between global jurisdictions, could further complicate stablecoin scalability. He cited Europe's regulatory approach under the Markets in Crypto-Assets (MiCA) regulation, which differs significantly from U.S. proposals, as an example of potential friction in the global stablecoin market.

For stablecoins to be economically viable, issuers must develop sustainable business models. Currently, most stablecoin issuers generate revenue through interest earned on reserve assets, a model influenced by the prevailing interest rate environment. Waller likened the challenge to Red Lobster’s failed "endless shrimp" promotion, noting that while a product may be popular, it must also be financially sustainable.

Alternative revenue sources include transaction fees and using stablecoins as a gateway to more profitable financial services. However, achieving scale remains a significant factor. Without widespread adoption, stablecoins may struggle to remain competitive against existing payment systems.

Waller emphasized that stablecoins should succeed or fail based on their utility and economic benefits. He urged policymakers to establish clear legal guidelines to foster innovation while safeguarding financial stability.