Regulators are Investigating Stablecoin: Could this Bring About Regulatory Clarity?

Stablecoins are the cornerstone of solving the volatile price swings of cryptocurrencies. For this reason, top stablecoins have seen a surge in valuation on the backdrop of an overall bullish crypto market. 

However, stablecoins have recently become the target of regulators in the U.S who have raised concerns about stablecoins being a threatening sector that could pull the rug out from underneath the entire crypto industry. 

Grated, regulators have already held endless discussions about stablecoins, however, implementations and concrete regulatory frameworks remain to be seen. As it stands, US regulators are laying the groundwork for stricter regulation that could influence the future of crypto in the country.

Stablecoins are cryptocurrencies designed to counter the hyper volatile nature of crypto markets. Typically, while regular cryptocurrencies such as Bitcoin and Ethereum have their inherent value determined by the market, a stablecoin’s value is pegged to that of a stable asset in most cases the US dollar. 

Therefore, for each minted stablecoin, an equivalent amount in dollars is stored in a vault as a reserve. Since stablecoins are ideally backed by safe assets, they are expected to maintain a tight link to the dollar (or any other stable asset) and be easily redeemable.

Concerns about a Bank run

However, reports indicate that regulators are concerned about a possible bank run were investors ever forced by circumstances to redeem their stablecoins for actual dollars. 

In July, U.S treasury secretary Janet Yellen held meetings with the President’s Working Group on Financial Markets to evaluate the role of stablecoin on the financial system. The meeting was arranged to assess the potential benefits of stablecoins while creating a guideline for managing the risks they could pose to the market. 

In the aftermath of the meeting, Yellen urged the U.S to quickly adopt stablecoin rules and move to establish a regulatory framework for stablecoin. Already, a group of U.S regulators has issued plans that will fix regulatory gaps around stablecoins.

Yellen’s efforts seem to be gathering pace given recent reports of Treasury officials meeting with executives in the financial industry to discuss further stablecoin regulations. According to reports, the discussions in the meeting revolved around plans to mitigate the risks of stablecoins. Solutions for a potential bank run were also discussed. 

As it seems, Treasury Officials are still gathering information with plans to release a broad report that could shape the future of stablecoins and crypto at large in the coming months. 

Is A Stablecoin Ban on the Cards?

Given the rising concerns, other regulators in the US have gone as far as suggesting a ban on U.S banks holding reserves for stablecoins. Massachusetts senator Elizabeth Warren has been vocal about her dislike for the crypto industry labeling the sector “the new shadow bank.”

In her remarks to the New York Times, the senator pointed out that cryptocurrencies offer users “many of the same services” as shadow banks. The only difference according to Warren was that crypto offers zero protection leave alone financial stability to its users.

Most of the concerns from regulators have been brought about by Tether’s parabolic rise in 2021 as the stablecoin’s market share jumped from $37 billion at the start of the years to a whopping $68 billion at the time of writing, according to data from CoinMarketCap.

Tether USDT: A Case in Point

The infamous Tether stablecoin has been eyeballed by regulators, given its controversial past for a long time. This year alone, a U.S probe into Tether is investigating whether the executives behind the stablecoin are involved in bank fraud.

The outcomes of the investigation could be devastating for the entire crypto market as a whole given that the USDT token is widely used for trading Bitcoin and other cryptocurrencies. The investigation by the U.S Justice Department will focus on Tether’s conduct years ago with a look at whether the company issuing the token concealed from the banks any crypto-linked transactions.

In response to the investigation Tether issued out a statement saying that Tether routinely has “open dialogues with law enforcement agencies including the DOJ” following its commitment to “transparency.”

Tether is by far one of the most popular stablecoins and is valued as the third-largest cryptocurrency, which is no mean feat for a stablecoin. The constant minting of new USDT tokens has seen a drastic increase in supply surpassing a 200% increase, according to data from CoinMarketCap. 

An Increased in Newly Minted Stablecoins

Tether USDT is not the only stablecoin that has seen a meteoric rise in its valuation and token supply. Circle’s USD Coin (USDC) has seen a 600% hike in its valuation with a current market capitalization of over $31 billion. 

Binance USD, a brainchild of the Binance crypto exchange, dwarfs both USDC and USDT in terms of percentage increase in market valuation. So far, BUSD has posted a supply rise of over 1,100% in 2021 soaring from a market cap of $ 1 billion at the start of the year to its current mark just above $13 billion.

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