Stablecoin regulations: Where we are and where we are going

In the early era of cryptocurrency, when only a few knew of any cryptocurrency outside of Bitcoin, there was a constant flood of criticism. Charlie Munger, vice president of Berkshire Hathaway, summed up the May attacks since describing Bitcoin as “disgusting and contrary to the interests of civilization ”. Yet, while remaining steadfast, Bitcoin has gone through, constantly penetrating mainstream finance on its own merits.

During 2020, a completely new cryptodynamics emerged in the form of decentralized finance (DeFi), on the background of smart contracts. Ethereum was the first to rebuild the financial sector without intermediation, growing from less than $ 1 billion to more than $ 158 billion in less than two years.

However, even before 2020, JPMorgan Chase was the first to name a new threat. The world’s largest bank pointed out that the destructive potential of Bitcoin goes hand in hand with smart contract platforms February 2018.

“Both financial institutions and their non-banking competitors face the risk that payment processing and other services could be disrupted by technologies, such as cryptocurrencies, that do not require intermediation.”

Now that crypto-mainstreaming is coming into sharper focus with hundreds of billions supporting it, we can expect to see a heavier regulatory arm. Jamie Dimon, CEO of JPMorgan, once again prophesied that November 2021.

“No matter what anyone thinks about it, the government will regulate it. They will regulate it for purposes (against money laundering), for (Bank Secrecy Act), for tax purposes. ”

Based on prevailing regulatory winds, here’s what Finance 2.0 can expect in 2022 and beyond.

Stablecoins to remain as the main regulatory target

Since Tether Limited launched Tether (USDT) stablecoin in 2014, nothing has been the same for cryptocurrency trading. Although there are doubts about Tether’s collateralization, the theory behind stable coins is simple. Since they are backed by assets equal to the value of the USD in a 1: 1 ratio, they can be redeemed for USD from the reserve.

In fact, stablecoins are digital wrappers for fiat currency, much like Wrapped Bitcoin (WBTC) is a digital wrapper for BTC on non-Bitcoin blockchain platforms like Ethereum. While this stability provided by a global reserve currency like the USD is extremely useful for trading and online wealth storage, it also provides potential vulnerability.

Governments are beginning to view stable coins as an entry point into disruptive DeFi, but with no restrictions, commercial banks must follow to manage fiat money. 2021 was a particularly explosive year for stable coins, rising 400% to a market capitalization of $ 150 billion.

The growing popularity of stable coins raises two primary questions. First, if there is banking, do they have enough liquid reserves (or legitimate reserves at all) to meet withdrawal requirements? Second, since stable coins already fulfill the role of digital currency, but privately, where does this place the CBDCs – digital currencies of the central bank?

Moreover, since stable coins are not registered as bank deposits, both the Federal Reserve and the Office of the Currency Controller have limited tools to track them. In the United States, the stable coin industry is on track to be regulated through Presidential Working Group (PWG) for Financial Markets, consisting of the SEC, CFTC, Ministry of Finance and Federal Reserve.

Group issued a report November 1, calling for stable coin issuers to be regulated on the basis of three principles:

  • Insurance with depository institutions
  • Giving federal agencies oversight of custody wallets
  • Limiting their ability to concentrate economic power

In other words, stablecoin issuers should have the same treatment as commercial banks. However, there is no consensus among these federal overseers. Gary Gensler, president of the SEC, called for stable coins to be registered as securities if they are backed by securities reserves.

In contrast, Teana Baker-Taylor, Policy Director of the Digital Chamber of Commerce, released regulatory course that brings the report. Stablecoine is not considered securities nor should they be regulated as banks, but as payment processors. She says,

“But we believe that stablecoin payment systems should be regulated in the same way that other retail-oriented digital payment transactions are regulated, according to the principle of the same activity, the same risk, the same regulation.”

This position seems to have bipartisan support. Both MP Jim Himes (D-Conn.) And MP Tom Emmer (R-Minn.) Said putting stable coins under a bank umbrella would be excessive killing that would destroy U.S. competitiveness. Instead, common terms like goods, currency, i security more legislative attention should be paid to the inclusion of digital assets as a basis for easier regulatory access.

Although digital assets have been present – and quite popular – for several years, mainstream adoption has increased significantly in recent times. This is mainly due to a number of factors – one of which involves increased access to digital assets. It is no longer necessary to log in to the crypto-native platform for buying and selling digital assets – a number of popular platforms for stock and forex trading, turn on eToro, now offers a variety of cryptocurrencies. With this increased approach, there will certainly be increased regulation.

India, the UK and Brazil: different approaches

While there is reason to remain optimistic in the US, India’s cryptocurrency and official digital currency regulation law aims to ban all private cryptocurrencies. Indian Prime Minister Narendra Modi betrayed a very unusual one statement on this account:

“Take cryptocurrency or Bitcoin as an example. It’s important that all nations work together to make sure it doesn’t end up in the wrong hands, which can ruin our youth. “

Also, the Reserve Bank of India (RBI) called for a total ban on cryptocurrencies on December 17, as detailed during its presentation to board members. Such general bans seem to go hand in hand with another provision of the law – the framework for creating India’s digital currency issued by the RBI.

However, even in its current state, the law would allow crypto exceptions if they promote the underlying technology to be used in the public sector.

Meanwhile, the British FCA is still behind its ban for the market, distribution and sale of crypto-derivatives to retail users. In recent news, the Bank of England (BoE) has called for the implementation of international crypto rules as no country can do it alone.

Specifically, Sarah Breeden, BoE Executive Director for Financial Stability and Risk Strategy, said in an interview with time that it is difficult for central banks to track the digital assets of institutional investors. However, BoE Financial Stability Report does not yet view cryptocurrencies as introducing monetary risk. Nevertheless, due to the instability of cryptocurrencies, the report calls for the creation of a new global regulatory framework while maintaining sustainable innovation.

Brazil is ahead of the crypto game, approaching El Salvador. The new laws are is being made which, if implemented, would allow some workers to receive payments in Bitcoin, effectively equating BTC as a legal tender. On a smaller scale, this has already happened in some American cities. For example, Francis Suarez, Mayor of Miami, tweeted he would accept a salary in full at BTC.

EU: The most advanced crypto approach

In the European Union, the Crypto Asset Markets Regulation (MiCA) is responsible for harmonizing the crypto framework in all 27 Member States. The organization produced a 168-page report which handles a precision regulatory knife, to the extent that it recognizes different types of stable coins. For example, MiCA looks at algorithmic stable coins like MakerDAO differently from ordinary ones supported by fiat. As such, they will be required to have a regulated guardian.

Another thing is how this can work if smart contracts run MakerDAO. Still, a fundamental requirement of MiCA is that all issuers of stable coins have $ 400,000 or 2% of their total reserve assets immediately available. In addition, those issuers of stable coins above the $ 1 billion market capitalization will be subject to a 3% backup.

Furthermore, the proposed MiCA rules aim to limit the use of stable coins within 27 countries so as not to jeopardize monetary policies or the upcoming digital euro. That being said, the EU’s position on digital assets is generally positive. With the new rules, a crypto company within one country could operate within the entire eurozone.

What can we expect in 2022?

In short, there is a clear trend towards regulating stable coins and preparing the groundwork for CBDC. In this context, central banks and governments view cryptocurrencies, including stable coins, as something that must be transparent – and monitored. Otherwise, they stand out from the new monetary system, which is slowly being assembled, with the potential to introduce instability.

This is what the constant refrain of “financial stability” means, referring to the largest central banking tool to date – the CBDC. Hence the desire to make all crypto assets more transparent.

Interestingly, however, the US, as the owner of the world’s global reserve currency, has been largely silent when it comes to any practical implementation of the CBDC. In that light, it might be more likely that a decentralized conglomerate of stable coin issuers will take on that role, and agencies rely on laws to prevent them from becoming too big for convenience.

Guest post by Shane Neagle from The Tokenist

Shane has been an active supporter of the decentralized finance movement since 2015. He has written hundreds of articles related to the development of digital securities – the integration of traditional financial securities and distributed book technology (DLT). He remains fascinated by the growing impact of technology on the economy – and everyday life.

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