Stablecoins have gone on to establish their relevance in the crypto space. That’s because they have proven over time that market participants or traders can leverage stablecoins to preserve their portfolio capital and save them from the market’s volatility. However, critics believe that they are some gambles in disguise. Regardless of the nature of the argument, regulators are coming after stablecoins.
The United States and the European Union are working round the clock to ensure that regulatory frameworks are created around the crypto space. This campaign needs investors’ funds to be protected while they take their profits without doubts of losing it the next day. Meanwhile, other nations might follow in the path of crypto regulation.
Despite the continuous pressure on having a regulatory framework for stablecoins, it is nearly impossible to create a policy that can work for all stablecoins. That is because stablecoins are of different shapes and sizes. Thus, no single solution can work for all stablecoins.
As popularly known, the top three stablecoins are attached to the U.S. dollar. These stablecoins — Binance USD (BUSD), Tether (USDT), and USDCoin (USDC)—have the backing of greenback reserves and other financial tools that help hold their value at $1 every time.
But Tether has undergone several scrutinies by the regulators to examine its viability and its reserve sources. This has pushed the other two projects to disclose their supporting assets and explain their commercial papers extensively. This convinced the public to hold the belief that Tether is not used as a payment option. Instead, it is working like a bank.
On the other hand, some stablecoins are pegged to other assets or commodities like gold, oil, or a reward system. An instance is Petro. Other examples of such stablecoins are UPCO2 associated with carbon credits and stablecoin like Terra (UST), which constantly relies on the market algorithm to keep a stable price.
Another encounter the market may have is the antagonist view when it comes to regulations. Some argued that the government should not involve itself in the crypto sphere because it may hinder innovative growth in the crypto industry. But what they refuse to remember is the historical context attached to the crypto existence and adoption.
An instance is the case of the wildcat banking era, where the greenback currency became the United States national currency. This same case applies to the 2008 crisis of the money market fund. In this case, federal agencies initiate rules to protect an innocent participant from the influence of big market investors.
For years, society has collectively created rules that protect consumers from market scams or bad judgment from individuals who have custody of their portfolios. Society created rules and regulatory policies that govern those who can issue money and redeem it. There are processes laid for agencies working to move money that can cause an economic heartquake.
Now, the big question remains one.
If we created such rules to protect investors and traders in the money market, why should we spare the rods for a crypto bank when we can save the world from its consequent crises?
Efficient One-for-One Advances for the Regulators
Given the government’s consideration to begin with stablecoin regulation, the first important step is to ensure that they hold their positions. That is, stablecoins should be represented with a fiat currency at a 1:1 ratio. As a result, any stablecoin being issued must be examined, regulated, and supervised. With that, consumers or users will have a clear representation of such stablecoins.
When you consider the historical reference of the European Union issuing and redeeming digital euros, you will agree that Electronic Money Institutions have real euros in the bank to which their digital euros are attached. This may be an excellent example for regulators on other sides to emulate and model with some modifications.
Thus, this explains that we must create a parallel scheme that allows those institutions to ensure seamless coin-to-fiat exchange by stablecoin users at any time. This must be regulated for the banks to have enough stashed money since banks leverage deposits to make money by interested lending parties.
However, there may be different technical interpretations for stablecoin issuance. It can be interpreted as being used in banking activities, payment options, or becoming a broker on its accord. This societal approval gives the regulators the absolute authority to determine what happens with stablecoin regulations.
As a result, regulators must work with the issuer to create the standards for issuers to be transparent when identifying the financial activities they are involved in. This report issuance holding details of stablecoin holdings helps users believe that their assets have a valid value.
On the other side, we must establish the same fundamentals for stablecoins representing exotic assets. They must hold the same value as the assets they claim their backing. But there may be a run in the maze for commodity-based stablecoins and more significant trouble for regulators working on algorithmic stablecoins. The latter is more challenging to constitute a regulatory framework around them.
Algorithmic Stablecoins: More Stress for the Regulators
There is a clear-cut difference between algorithmic stablecoins and those pegged to fiat currencies such as Tether (USDT). Initially, they do not have underlying collateral and work differently in the space. But they are noteworthy for the regulators because they penetrate well into the traditional financial system. Thus, they are standing at the center of interest since they are out of jurisdictional laws.
Transparency is vital at both issuers’ and users’ ends because regulatory agencies can access information about individuals making illicit moves in the industry via whale crypto participation.
On paper, it is easier to work around some regulatory framework that will guide stablecoins use. But its practicality begs for different questions that will cover the entire crypto world for regulations. While this may look possible, there is still enough time for innovation before its completion.
With the widespread adoption of USDT, regulators will come for it to establish the kind of transactions they are used for and establish the licensing requirements. Meanwhile, algorithmic stablecoins are left out until there is enough capacity to classify them as commodities or not. Likewise, they can be banned after thorough examinations.
Regardless of the results of regulatory efforts, it is essential to note there will be a new—and harsh—focus on stablecoins from the regulatory world. With establishing stablecoins as critical components of the crypto ecosystem, regulating the crypto space will help retain their reputation and make them soft for users to leverage.