US Regulators Set Sights on Reigning in Stablecoins

US Regulators will be policing cryptocurrency with its primary focus trained at stablecoins

By
Chung Yee
on
October 27, 2021
Category:
Blockchain News

Ringfencing Stablecoins

In an article by Bloomberg, the US Securities and Exchange Commission (SEC) is expected to crack down on stablecoins as a report is expected to be released by the Treasury Department together with other government agencies on SEC’s authority to regulate stablecoins. The report will also urge Congress to pass laws to impose similar treatment as that of bank deposits.  

This came as no surprise to the crypto industry as Gary Gensler, the chair of the SEC has called stablecoins ‘poker chips’ in an event hosted by Washington Post and warns of impending regulation. Jerome Powell, the Federal Reserve (Fed) chief in a congressional hearing in July said that if America has its own Central Bank Digital Currency (CBDC), the need for stablecoin and cryptocurrency will be eliminated. 

Source: USDT, USDC and BUSD are popular stablecoins that play an important role in the crypto economy and this is reflected in the total market capitalization of $116.5 billion

Although the often-quoted narrative by the regulators is the need to maintain proper collateralization for investor protection, there is another equally compelling narrative. The regulators’ sentiments could be underlined by the fact that stablecoins mimic the role of the US Dollar. If the Fed decides to issue its own digital currency, the direct competitors are the stablecoins. 


Regulators’ Uneasiness with Stablecoins

Stablecoins are tokens backed by fiat or other assets such as gold or other cryptocurrencies. If the stablecoin is pegged to the US dollar, it will track the dollar as the underlying asset. Therefore, it becomes the functional currency within the ecosystem that does not fluctuate in value. The guarantee to its issuance and redemption is the collateral held as a reserve. 

This issue has been the center of controversy surrounding Tether (USDT), the most popular stablecoin. However, today stablecoins can be non-collateralized. To achieve this, a decentralized platform can operate autonomously through smart contracts that balance the supply of the coin to the changes in the value of the coin.

The arguments against stablecoins would have some rationale if aimed at centralized institutions such as Tether (USDT). This issue can be resolved by improving transparency and imposing strict and periodic audits. Decentralized protocols such as Terra Luna’s algorithmic stablecoin (UST) are examples of how stablecoins can hold their value even without regulatory safeguards.  

CBDC to Replace Stablecoins?

Stablecoin is a staple commodity in the crypto space. CBDC cannot replace the role of stablecoin in the crypto space. Although it is a more dynamic and efficient form compared to the physical currency, its main drawbacks are centralized issuance and geographical restrictions. Different states will have a preference for their own CBDC. 

Source: Fiat collateralized stablecoins is more acceptable to the regulators compared to crypto collateralized stablecoins or non-collateralized stablecoins

The crypto space has grown because it feeds on the narrative of being decentralized and permissionless and CBDC is the direct antithesis to that narrative. Regulation will eventually arrive and centralized institutions that issue stablecoins will be subjected to stricter audit requirements. There is also the possibility of imposing a margin of over-collateralization if the backing is not based on fiat. The mystery remains as to how the regulators are going to regulate a fully decentralized platform that issues algorithmic stablecoins. 

Tags:
Chung Yee

Chung Yee has a legal background and has been involved in research works for the legal and compliance industry. Writing is his passion, centered on topics such as the blockchain and finance. His largest crypto holdings are Solana, Ethereum, and BNB Token.

Text Link

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros elementum tristique. Duis cursus, mi quis viverra ornare, eros dolor interdum nulla, ut commodo diam libero vitae erat. Aenean faucibus nibh et justo cursus id rutrum lorem imperdiet. Nunc ut sem vitae risus tristique posuere.