Stablecoins in the Spotlight: Is regulation around the corner?
The rush to regulate cryptocurrencies took on new momentum this year in the U.S. as the exploding digital currency market crossed over into the mainstream. With an all-time-high crypto market capitalization of more than $3 Trillion reported in November, federal governing bodies began urgently posturing to be the first to wrap their arms around regulating the industry. And where to start? With what some call the “low hanging fruit” – stablecoins.
Unlike Bitcoin, the world’s first digital currency whose value is determined by supply and demand, stablecoins are designed to keep their prices relatively stable, usually hovering around $1US. The value of these digital currencies is “pegged” to a tangible resource such as the U.S. Dollar, gold, or are collateralized by other digital coins or a coin algorithm.
Stablecoins are widely used in the Web 3.0 world to fund Decentralized Finance (DeFi) transactions, or to store value. As the crypto market grew in 2021, so did stablecoins.
“In 2021 the market for and interest in stablecoins—digital assets designed to maintain a stable value relative to a national currency—has skyrocketed, increasing over 500% with a market cap of approximately $130 billion,” jdsupra.com reported in November.
Today, even though Bitcoin and other cryptos are ending the year in bear territory, stablecoins have grown in value with a current market cap of nearly $160 billion.
The leading stablecoins by market cap include Tether (USDT), US Coin (USDC), Binance (USBC), TerraUSD (UST) and Dai (DAI).
While the overall stablecoin market cap can’t compare to that of Bitcoin, they are of great concern to the traditional financial system. Why?
US Senator Elizabeth Warren put it bluntly in a recent hearing on Capitol Hill: “Stablecoins pose risks to consumers & to our economy,” she said. “They’re propping up one of the shadiest parts of the crypto world, DeFi, where consumers are least protected from getting scammed. Our regulators need to get serious about clamping down before it is too late.”
Securities and Exchange Commission Chairman Gary Gensler compares stablecoins to “poker chips at the casino,” and Federal Reserve Chairman Jerome Powell, a man of few words, recently mentioned he was interested in seeing stablecoins regulated. "Stablecoins can certainly be a useful, efficient, consumer-serving part of the financial system if they're properly regulated,” he said at the Federal Market Open Committee Meeting (FOMC) this month. “And right now, they aren't."
The U.S. isn’t alone in sounding an alarm about stablecoins. The International Organization of Securities Commissions (IOSCO) in October released its guidance “confirming that the Principles for Financial Market Infrastructures (PFMI) apply to systemically important stablecoin arrangements (SAs). Essentially, the international group is recommending that “stablecoin arrangements should observe international standards for payment, clearing and settlement systems.”
Translated, the guidance means, stablecoins should be treated like fiat currencies and abide by fiat currency rules and regulations.
Across the pond, U.S. lawmakers, traditional financial institutions and crypto entities are engaged in a tug-of-war over just how these coins should be regulated.
First, in November, the President’s Working Group on Financial Markets weighed in with its highly anticipated recommendations, urging “Congress pass legislation to strengthen oversight of stablecoins, likely requiring nonbank issuers to follow rules similar to banks, and to clarify responsibility for different regulators,” the American Banker reports. “But anticipating Congress may not act right away, the report also lays the groundwork for direct federal regulation, a course that faces opposition from the stablecoin industry and Republicans.”
"It's clear from the PWG report that [the regulators] would prefer congressional action that would provide roles for the different regulators," Douglas Landy, co-head of the New York-based White & Case's Financial Institutions Industry Group and head of the law firm's U.S. Financial Services Regulatory practice, told the Banker. "It's also clear that the regulatory agencies are not going to wait if Congressional action does not come about."
On December 14, the crypto world was tuned to the U.S. Senate Committee on Banking, Housing and Urban Affairs hearing on cryptocurrencies. The tone of the hearing was much more positive compared to previous hearings on digital currencies. Representatives from the crypto sector acknowledged that regulation is necessary but disagreed with the PWG recommendation to move crypto under the auspices of traditional banks.
“Is it consistent to take the position that only banks should be allowed to issue stablecoins, but then fail to grant bank charters to the largest issuers of stablecoins?” asked Brian Brooks, current CEO of Bitfury and a former U.S. Comptroller of the Currency.
Stablecoin’s have a fan in the U.S. Congress – Senator Patrick J. Toomey, who serves as the Ranking Member on the Committee (and holds cryptocurrencies).
“Stablecoins offer tremendous potential benefits, including greater payment speed, lower payment costs, expanded access to the payment system, and programmability,” he said. “A regulatory framework should follow from legislation. The legislation should address consumer protection and financial system risks, but it should also be designed to promote innovation in the rapidly evolving global digital economy.”
“Regulation of stablecoins should be narrowly tailored and harmonized within the United States and across jurisdictions globally,” he continued. “In addition, regulation should seek to maintain the international competitiveness of the United States. Regulators should acknowledge that privately issued stablecoins would not undermine the international status of the U.S. Dollar, but that well-managed stablecoins could actually support it. Finally, regulation should allow stablecoins to be interoperable with the current financial system.”
Toomey clearly is driving toward Congress talking the lead in developing a stablecoin regulatory framework. But he has competition from regulators.
“Following on from the Financial Stability Oversight Council's November 2021 report on stablecoins, the top official for financial oversight at the U.S Treasury stated that ‘If Congress does not enact legislation, the regulators will try to use what authority they have,’” Cointelegraph reports.
As stablecoin regulation comes into focus, other cryptocurrencies such as Bitcoin will most likely be next. The question is, will digital currencies be swept in with traditional payment devices such as fiat currency or governed by banks? Or will regulation be innovative and built just for this new way of exchanging assets?
“Digital assets have the potential to be as revolutionary as the internet,” Toomey said. “It’s important lawmakers and regulators alike work to continue America’s longstanding tradition of fostering technological innovation—not stifling it.”
Joyce Pavia Hanson