Regulation of stablecoins: first steps in Western markets
The recent decoupling of the HUSD token from the dollar has again drawn attention to stablecoins. Money transfers and payments in stablecoins have become a familiar and convenient form of payment, and keeping funds in stablecoins should protect investors from rapidly changing exchange rates. Amid economic difficulties and geopolitical tensions, the popularity of stablecoins is only growing, but recent incidents make us think about the real regulation of coins pegged to the dollar.
A stablecoin is a digital token pegged to other assets. From the name of the token, it is clear that it was conceived as a digital asset, which is the least susceptible to the usual volatility for cryptocurrencies, and should be equal to stable fiat currencies. Most stablecoins are now pegged to the US dollar. Among crypto traders, stablecoins have become popular for several reasons: stablecoins have the lowest commissions and peg to the dollar ensures ease of settlement.
Today, the stablecoin market is worth $150 billion, and it continues to grow rapidly, while the attention of regulators to the market proportionally increases. After stablecoin TerraUSD and its paired token Luna collapsed by $40 billion in May of this year, many governments tightened their grip on stablecoins. Regulators fear that other stablecoins may become infected and their collapse could cause huge losses for the economy and investors.
Why Regulators Are Concerned About Stablecoins
TerraUSD supports pegging to the Luna token via an algorithm, but most other major stablecoins hold a reserve of traditional assets to support the tokens in circulation.
The European Central Bank has identified a number of risks that stablecoins pose to the sustainability of the global financial system, such as through impact on the financial sector and impact on investor confidence. In the May Financial Strength Report, the US Federal Reserve emphasized that stablecoins are not stable because they are backed by assets that can lose value or become illiquid in extreme market conditions. The Fed also noted in the report that these vulnerabilities could be exacerbated by a lack of transparency about the riskiness and liquidity of assets backing stablecoins.
For example, in October last year, the US Commodity Futures Trading Commission fined Tether $41 million for misrepresenting fiat-backed reserves. Tether claimed that the USDT stablecoin was fully backed by real US dollars, which actually turned out to be unsecured receivables and non-fiat assets.
Regulation of cryptocurrencies in the development process
Simply put, regulators seek to assess the risk of stablecoins by learning more about the type and level of reserves they are backed with. This will largely determine the trajectory of movement in the event of a bank failure scenario.
Around the world, many countries have begun to take the first steps in enacting legislation to oversee digital assets. In the US, a digital asset bill that will cover stablecoins is expected to be delayed until at least September. Although the details of the proposed structure have not been made public, Blockworks said the US Treasury may require digital asset providers to protect customer assets to protect them from possible bankruptcy.
The UK Treasury has submitted a bill to regulate digital assets, including stablecoins, which will be discussed in Parliament before adoption. The bill aims to extend existing financial rules to cryptocurrencies and has been positively received by the country’s crypto industry despite the uncertainty of the new rules.
In June, the European Union introduced the Crypto Asset Markets Bill (MiCA), which is seen as a comprehensive regulatory framework for digital assets in the region. Under the new rules, which are expected to be implemented as early as 2024, stablecoins will need to maintain sufficient redemption reserves in the event of a run on funds. High-volume stablecoins also face a limit of 200 million euros in transactions per day.
Crypto Firms React to Proposed EU Rules
The EU bill MiCA has been criticized by 46 leading crypto companies operating in the region. The reason is that some sections of the legislation jeopardize the privacy and security of personal data of digital asset owners. In a letter addressed to EU finance ministers, representatives from 46 firms argue that these laws will effectively make the EU a less competitive place for crypto startups and top tech professionals.
However, the bill was welcomed by large companies Circle Internet Financial Ltd and Tether Holdings, whose USDC and USDT stablecoins account for almost 80% of the market. Tether CTO Paolo Ardoino welcomed the clarity on the regulation, telling CNBC that “MiCA is one of the most progressive initiatives to date and aims to spur innovation and adoption of cryptocurrencies in the European region.”
Circle chief strategy officer Dante Disparte was also positive, telling CNBC that the new EU program represents a “significant milestone”. He added that MiCA “will be to cryptocurrencies what the GDPR (EU data protection rules) was to privacy.”
What stablecoin regulation means for users
It is already clear that the regulation of stablecoin issuers will lead to reserve transparency and regular auditing. The additional control will help strengthen the management of reserves, which will favorably affect the value of stablecoins and allow them to live up to their name. Cryptocurrency users will also be able to make more informed decisions about which stablecoin to trust. Such results will strengthen investor protection and restore confidence after the recent downturn in the cryptocurrency market.
As the Bloomberg report notes, the public could have more choices if regulation encourages central banks, commercial banks and other institutions to issue their own stablecoins.
Since the use of stablecoins is expected to grow along with the growing popularity of digital assets, regulation looks like a timely move that will bring comprehensive benefits to both the crypto industry and users.