Stablecoins are the backbone of the entire cryptocurrency industry, however regulators in many countries view them as a direct threat to the financial system and are seeking to take tight control.
Stablecoins have become the hottest topic in the cryptocurrency market lately. This is not surprising as assets have shown impressive growth in 2020, driven by the development of the decentralized finance (DeFi) market. The aggregate value of stablecoins has exceeded $ 30 billion at the time of writing, reflecting increased investor demand for price-stable assets during volatile times.
Stablecoins are public blockchain tokens backed by fiat or other assets. Their value is usually pegged to stable traditional currencies such as the US dollar. The key goal of the coin is to minimize volatility. In total, there are more than 200 stablecoins on the market, USDT is the largest in terms of capitalization. The market value of Tether has quadrupled since the beginning of 2020 and now accounts for ¾ of the stablecoin market.
Read about what stablecoins are and how they work in our article.
Stablecoins under control
In early December, the US Congress introduced a bill – STABLE ACT, which requires issuers of stablecoins to obtain banking licenses and regulatory approval. The initiator was a group of lawmakers led by the representative of the Democratic Party Rashida Tlaib. If adopted, stablecoin issuers would need to obtain approvals from the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC) and the banking regulator.
In addition, the law declares that blockchains have the same status as other global financial networks – SWIFT, ACH and FedWire. It endorses the use of stablecoins and cryptocurrencies as legitimate alternatives to other real-time payment systems.
The authors of the bill argue that stablecoins are an extension of a shadow banking system that profits from poor citizens.
Why regulators need tight control
I think there are three key reasons for this biased vision and push for overregulation.
At first, stablecoins in the understanding of the state are a lot like CBDC and are analogous to fiat currencies. In the case of stablecoins, traditional financial institutions and governments fear the uncontrolled digital issuance of fiat.
In addition, they risk losing control over economic processes, which is leaking into third hands.
Secondly, initially the attention of regulators to stablecoins was drawn by Mark Zuckerberg with the Libra project (now called Diem). It would be strange to imagine that the United States would easily agree to redirect huge cash flows into the hands of a private company with a huge audience.
Thirdly, there was an ambiguous situation around Tether. In the spring of 2019, as part of a lawsuit by the New York State Attorney’s Office against Tether, the chief attorney of the stablecoin issuer Stuart Hogner indicated that USDT is backed by fiat reserves only 74%, and 26% is backed by other assets. The New York prosecutor’s office set the deadline for filing the required documents on January 15.
The crypto community is eagerly awaiting the denouement and evidence that Tether has released large quantities of USDT out of thin air. But on January 15, it never came.
Until January 15, iFinex had only to complete the transfer of documents on mutual financial transactions of Bitfinex and Tether to the New York Attorney General.
Further, much will depend on the efficiency of work in the Prosecutor General’s Office and when they deem it necessary to make the facts public. Market participants are most afraid that if necessary, Tether will not return their fiat collateral to USDT token holders.
These reasons have led to the fact that regulators in the United States perceive the stablecoin market as a shadow segment of the banking system, which should be as difficult to regulate as possible. But this approach will overwhelm a large chunk of the new cryptocurrency world and will likely lead to the only players in this new space being fat fintech companies with the necessary resources to comply.
Communication with the outside world
Stablecoins today are the main bridge between traditional finance and the cryptocurrency market. Traders are converting cryptocurrency assets into stablecoins to lock in profits and insure against losses in case of sudden price changes. Not to mention the fact that stablecoins are often the only possible option for receiving and sending money in countries with an undeveloped banking system.
Going forward, stablecoins can become the foundation for faster and cheaper payments, helping people pay for goods or store money. In addition, they have a strong impact on capital markets, fundamentally changing the way they work. But this will only happen if the government does not stifle stablecoins with overly strong regulation. I hope that the major market players (most of whom have already expressed their position) will influence what is happening and will not let the largest part of the cryptocurrency market die.
The author of the article is EXMO Exchange Development Director
NOTE: This article contains the estimates and judgments of the author and does not reflect the position of the editorial staff of BeInCrypto.
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