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AltFi Series (2 of 3): Regulatory Landscape on Stablecoins
AltFi | Stephan Roth | Oct 5, 2022
This article is the second part of a three article series on stablecoins and the future of money. The first article can be read here .
Speaking at the Opportunities & Challenges of the Tokenization of Finance event in Paris last week:
Loud and clear message
Christine Lagarde, President of the European Central Bank:
Born out of a "cultural revolution" and now accepted by the "Visas, Mastercards and Paypals" of this world, the growth of the crypto industry has shocked regulators across the globe.
See: ECB Publishes Macroprudential Bulletin on Stablecoins, Climate Risk, and DeFi
Federal Reserve Chairman, Jerome Powell:
No transparency, no regulation, no stablecoins or crypto. We need to be very careful how crypto activities are taken within the regulatory perimeter, wherever they take place there is need for more appropriate regulation.
Managing director of the Monetary Authority of Singapore, Ravi Menon
I see more promise in stablecoins, however this will depend on the regulatory regime in place to track them.
- Stuck in limbo, Andrew Smith, government and regulatory affairs director for America at GBBC Digital Finance told AltFi that the current US stablecoin regulatory landscape has "proven impossible for folks to figure out".
- Across the Atlantic, Smith's colleague Lavan Thasarathakumar, government and regulatory affairs director EMEA at the GDF echoed his sentiment: [stablecoins] are a global technology," he told AltFi, adding that regulatory isolation would only cause greater fragmentation between jurisdictions.
See: UK Proposes Regulations That Would Recognize Stablecoins As A Form Of Payment
- Both Smith's and Thasarathakumar's statements are eerily true. In the US, a slew of stablecoin bills have been proposed to Congress are stuck in deadlock and the EU's Markets in Crypto Assets (MiCa) framework lacks practicality. The UK is stuck between a rock and a hard place, trying to remain relevant in the stablecoin debate.
- Traditional banks and consortiums are well aware of this and are ready to contest crypto-native stablecoin issuers on the grounds of regulation and compliance as the race for the future of money heats up.
Tough in the US
- 100% collaterisation: In the US, stablecoins permitted to operate and be issued have been called 'payment stablecoins' and 'qualified stablecoins', which must be redeemable on demand on a one-to-one basis in US dollars, must be 100 per cent collateralised in the form of high-quality reserves including cash, cash equivalents or short-term obligations and must provide independent audits of its reserve composition.
- Under these rules and directions, algorithmic stablecoins such as terraUSD would not qualify since such stablecoins are not backed by fiat collateral. Other major stablecoin issuers who would not pass the collateralisation test are market leader Tether and Maker DAO's DAI.
- Banks and non-banks: In the US there is split between depository institutions and non-depository institutions. Across the seven major stablecoin-related acts unveiled this year, all call for a separation between banks and non-bank issuers, paving a pathway for traditional banks to issue and custody of their stablecoins.
See: Vitalik: Designing Principles-based Stablecoins that (may not) collapse
- FDIC: Critically, the right to issue stablecoins revolves around federal deposit insurance, which is overseen by the Federal Deposit Insurance Commission (FDIC). At present, the FDIC has refused to insure crypto-native firms, with allegations suggesting that the FDIC has urged banks not to interact with crypto firms.
- There are two reasons why FDIC insurance is paramount to crypto-native stablecoin issuers: maintaining their peggs and the right to custody crypto.
- Stablecoins will and have been vying for their bank charters, which are difficult to acquire, particularly if the FDIC does not wish to insure them.
- Regulatory turf battle: To add to the regulatory disarray, there is an ongoing battle between the Securities and Exchange Commission (SEC), which views most cryptos as securities and the Commodity Futures Trading Commission (CFTC) which thinks of them as commodities.
Continue to the full article --> here
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